Mutual Fund Business

[Securities and Exchange Board of India (Mutual Funds) Regulations, 1996]

Mutual Fund as name suggests its collection of fund for the collective goal to make mutual earning and distribution thereon. It is a professionally managed investment scheme. It is controlled by an Asset Management Company (AMC) that collects funds from group of Investors and invest such pooled funds either in Equity or Debt, as per the investment strategy of Mutual Fund.

Category of Investment:

Equity: Refers to ownership of underlying Company or Organization/Entity giving power to vote in the conduct of general meeting and in return provides the Interim or Final Dividend of Entity. It bears the share of loss as well as profit, as the case may be being Equity Owner of Company/Entity.

Debt: Refers to lender of particular organization or issuing agency of such debt paper, bond, debentures or else. It gives right of interest on such instrument instead of ownership and voting rights thereon. It has upfront fixed rate of income as interest.

Mutual Fund as per their investment strategy create fund where investor buys unit and become unit holder of that particular fund. Thereafter the risk and reward is as per nature of fund with its instruction or direction to use the collected fund in specified class of assets.

Illustrative List of Fund:

• Debt Fund (DF)
• Equity Fund (EF)
• Equity Linked Saving Scheme (ELSS)
• Gilt Funds
• Diversified Fund
• Index Fund
• Liquid Mutual Fund
• Debt-oriented hybrid Funds
• Arbitrage Funds
• Dynamic Bond Fund

Statistically:

There are 49 Mutual Funds registered with Board, out of which 1 Entity working is suspended by Board therefore effectively there are only 48 Mutual Funds in India. Namely Yes Mutual Fund, Tata Mutual Fund, UTI Mutual Fund, SREI Mutual Fund, SBI Mutual Fund, Mahindra Manulife Mutual Fund, LIC Mutual Fund, L & T Mutual Fund, HDFC Mutual Fund and so on.

As on Feb 2021 Deployment of Fund into Debt Segment by Mutual Fund.

Above explained fund for given time frame is distributed into following assets class, generally:

• Government Securities
• Money Market Instrument (Other Than Corporate Bonds)
• Commercial Paper – Bank, NBFC, Real Estate and Others
• Bank Certificate of Deposit
• Treasury Bills
• Collateralized Borrowing and Lending Obligation (CBLO)
• Other Money Market Instrument
• Corporate Debt (Including Floating Rate Bond, NCDs and Others)
• PSU Bonds/Debt
• Equity Linked Debentures/Notes
• Securitised Debt
• Asset Backed Securities
• Mortgage Backed Securities
• Single Sell Downs/Single Loan
• Bank FD

As on Feb, 2021 Deployment of Fund into Equity Segment by Mutual Fund.

As on Feb, 2021 Deployment of Fund into REIT/INVIT by Mutual Fund.

Application for registration of Mutual Fund shall be in Form A by the Sponsor. It should be accompanied by non-refundable application fees INR 5 Lakh. The data, information and documents shall be signed and certified by competent person having authority to do so and all signatures must be in original. Further the entire list of documents is required to be numbered and arranged accordingly. Once Board scrutinize the documents and information so far submitted by applicant, provides the Registration as Mutual Fund for which applicant again need to remit INR 25 Lakh as Registration Fees.

Modes of Payments:

Applicant shall pay fee by way of direct credit in the Bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by means of Bank Draft payable to “The Securities and Exchange Board of India” at Mumbai.

Stakeholders:

Mutual Fund has major three tier structure of Sponsor, Trust and AMC. Other than this, the remaining participant on the picture are Trustee, Transfer Agent and Custodian. Unit Holders of Mutual Fund are actual investor who subscribe the issue of capital. Securities and Exchange Board of India is regulating Board since inception, operation, management and closure too.

Applicant shall be fit and proper person as per criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulation, 2008. It prescribes the fit and proper criteria as:-

• Integrity, reputation and character  
• Absence of conviction and restraint orders
• Competence including financial solvency and net-worth

Sponsor should have Sound Track Record, as per definition given by Board on regulation for “Sound Track Record” which means as below:-

• Carrying financial business for a period of not less than 5 years and
• Net-worth is positive in all the immediately preceding five years and
• Net-worth in the immediately preceding year is more than capital contribution of the sponsor in the Asset Management Company (AMC)
• Profit after providing for depreciation, interest and tax in three out of the immediately preceding 5 years, including the fifth year

1. Mutual funds are in the form of trust and the trust deed has been approved by Board
2. Sponsor has contributed or contribute at least 40% to the net worth of the Asset Management Company (AMC)
3. Sponsor or director/principal officer engaged at Mutual Fund should not have been guilty of fraud, convicted of an offence including moral turpitude or has not been found guilty of any economic offence
4. Appointment of trustees to act as trustee for mutual fund in accordance with provisions of the regulations  
5. Appointment of Asset Management Company to manage the mutual fund and operate the scheme of such funds along with procedural requirement for appointment of custodian in order to keep custody of the securities

No Sponsor of Mutual Fund, its associate or group company including Asset Management Company of the fund, through the schemes of the mutual fund or otherwise, directly or indirectly have 10% or more of the share-holding or voting rights in the Asset Management Company or trustee company of any other mutual fund or representation on the board of the asset management company or the trustee company of any other mutual fund. 

Example:

• Mutual Fund Name: HDFC Mutual Fund
• Registration No: MF/044/00/6 since 30th June, 2000 to perpetual
• Sponsors: Housing Development Finance Corporation Limited and Standard Life Investments Limited
• Trustee: HDFC Trustee Company Limited
• Registrar and Transfer Agent: Computer Age Management Services Private Limited
• Custodian: HDFC Bank Ltd, CitiBank N.A. and Deutsche Bank A.G.

Annual Fees:

Every Mutual Fund is required to pay Annual Fees as per the rules prescribed on given regulation. It shall pay before the 15th April each year annual service fee for every financial year from the year following the year of registration. The fees is based on percentage mode of average assets under management as on year end 31st March of every year. It read as below:-

1. Average assets under management (AAUM) up to INR 10,000 Crore then Annual Fees shall be 0.0015% of the AAUM

2. Part of AAUM above INR 10,000 Crore then Annual Fees shall be 0.0010% of the portion of AAUM in excess of INR 10,000 Crore

• Subject to a minimum of INR 2, 50,000 and a maximum of INR 1, 00, 00,000
• Payment mode is same as described in above paragraph.

• Applicant details and compliance officer details
• Sponsor details, contact address and contact person
• Certificate of Incorporation, Memorandum of Association and Article of Association of Sponsor
• Shareholding pattern and capital structure of Sponsor
• Audited financial statement of last 5 years
• Descriptive details of significant accounting policies
• System and procedures of company and essential internal controls in order to carry on the business of the company
• Name of associate companies/group companies/subsidiaries etc.
• Board of Directors, Key Managerial Personal and management of company name, experience, qualification and profession of Directors with proper profile and supporting documents
• Organization structure
• Board of Directors of associate organization, companies and subsidiaries
• Name and address of bankers and auditors of Sponsor
• Court case/litigation in which sponsor may have been involved in the last three years
• Copy of Draft Trust Deed
• Draft investment management agreement
• Draft custodian agreement

This are the illustrative list of required documents and information upfront to file an application to Board for Mutual Fund Registration.