Explain the Structure of Mutual Fund Operations Ι Types of Mutual Fund
Structure of Mutual Fund
In India, the mutual fund is operated by various entities like sponsors, Mutual Fund, Trustees, Asset Management Company, custodian and registrar and transfer agents.
- Sponsor: The sponsor of a mutual fund is similar to the promoter of an entity. The sponsor could be a bank, a financial institution or a financial services company. For example, the sponsor of Reliance Mutual Fund is Anil Dhirubhai Ambani Group (ADAG).
- Mutual Fund: The mutual fund is constituted as a trust under the Indian Trust Act, 1881 and registered with SEBI. The beneficiaries of the trust are the investors who invest in various schemes of the mutual fund.
- Trustee: The trust enters into contracts in the name of the trustees who can be either individuals or a corporate body (a trustee company). The trustee company is incorporated with limited liability under the Companies Act 1956.
- Asset Management Company: The Asset Management Company is a separate company appointed by the trustees to run the mutual fund.
- Custodian: The custodian handles the investment back-office operations of a mutual fund which includes the receipt and delivery of securities, collection of income, distribution of dividends and segregation of assets between schemes.
- Registrar and Transfer Agents: The registrar and transfer agents handle investor-related services such as issuing units, redeeming or repurchasing units, sending the statement of accounts to the investors etc, Some fund houses handle such functions in-house, while others outsource it to SEBI approved registrars and transfer agents like Karvy and CAMS.
Types of Mutual Fund
Funds are classified as open-ended close-ended, exchange-traded funds.
- Open-ended scheme: Open-ended funds are open to investment from investors at any time. Investors can purchase shares directly from the open-ended fund at any time. In addition, investors can sell (redeem) their shares back to the open-ended at any time. Thus the number of shares of an open-ended fund is always changing.
- Close-ended scheme: The subscription to a close-ended scheme is kept open only for a limited period (usually one month to three months). and has a fixed maturity period. Closed-end funds do not repurchase (redeem) the shares they sell. Instead, investors do have an option to sell the units on a stock exchange similar to selling shares of a corporate entity.
- Exchange-traded Funds: Exchange-traded fund (ETF) is a hybrid of a close-ended index fund and an open-ended index fund. Like a close-ended index fund, it is listed on the stock exchange and like an open-ended fund, it creates and redeems units in line with the rise and fall in demand.