The functions of Mutual Fund Organizations (MFO) can be described as (a) Collection of funds from public (b) Investment of funds collected from public in capital market (c) Proper management of investment portfolio as a trustee to the investor’s money. The investment made by the public/investors in the AMC under a scheme is divided into number of units. The investor will be allotted number units in the scheme proportionate to total investment in the scheme. The investor is thus called unit holders. The Mutual Fund Organizations (MFO)s with huge resource of investments of public and a team of experts in their employees roll, analyses investment opportunities in various securities, bonds and financial investments. Based on the appraisal made by the specialists, investment decisions in the capital market to buy/sell the securities will be taken. The profit earned in the form of capital appreciation is distributed among the investors in the scheme after appropriating the administrative and other overhead expenses.
Who are the parties to mutual funds?
Besides investors the following three parties are involved in Mutual Funds Set up.
- Asset Management Company
- SEBI the regulator.
Trustees: All mutual funds are set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and custodian. The trust is established by a sponsor or sponsors like a promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of management and supervision over AMC and they monitor the performance and compliance of SEBI regulations. As per SEBI regulations at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
The Asset Management Company (AMC): The Asset Management Company is formed by the Mutual Fund Organization (MFO) which invests the money for buying of shares, deposits, bonds, Government securities etc. The AMC makes profit or loss by regular trading of assets held by it. An AMC should have a minimum of net worth of Rs.10 Crores. The AMC invest their funds in small cap, mid cap and large cap companies. The companies are classified as small cap (up to 150Crores), mid cap (between 150 crores to 1500 Crores) , large cap (above 1500 crores) on the Market capitalization of Companies.
SEBI as regulator: The Mutual funds are subject to SEBI regulations and they are monitored and inspected by SEBI. The set of regulations for the mutual funds was notified by SEBI in 1993. Subsequently, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has been issuing guidelines to the mutual funds from time to time to protect the interests of investors.