A Mutual Fund is a TRUST that pools the savings of a number of investors who share a common financial goal.
The money collected is then invested in capital market instruments such as shares, debentures and other market securities. The investments of the mutual fund are driven by the investment objectives of the scheme.
The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them after recovery of the management expenses.
Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
FLOW OF FUNDS
The following are the parties to a Mutual Fund:
Unit Holder: is a person who is holding the units in a scheme of a mutual fund. The term is comparable to shareholder in case of a company. Unit holder can be a resident individual, HUF, company, NRI, partnership, society etc.
The Mutual Fund: As stated, the Mutual Fund is the legal entity in the form of a trust which holds investments of its Unitholders.
Sponsor: A sponsor is the promoter who sets up the Mutual Fund, appoints trustees and the AMC in accordance with the SEBI Regulations. Generally the sponsor and the AMC are part of the same business house.
Trustee: A trustee is appointed by the sponsor. The trustee holds the property of the mutual fund for the benefit of the unit holders and is responsible to the investors of the fund. The trustee is vested with the general power of superintendence and direction over the AMC.
Asset Management Company(AMC): AMC is the business face of the mutual fund as it manages all the affairs of the fund. Investment professionals employed by the AMC determine which securities to buy and sell in the fund’s portfolio, consistent with the fund’s investment objectives and policies. In addition to managing the fund’s portfolio, the AMC often serves as administrator to the fund with the support of the R&T agent and the Custodian.
R&T Agent: The Registrar and Transfer Agent (R&T) helps investors with the purchase of units in the Mutual Fund schemes, redemptions and switches, change of address and bank details and resolving related queries and complaints. CAMS and KARVY are the key R&T agents in India.
Custodian: The securities which form a part of the mutual fund’s portfolio are usually held by an authorized custodian. The custodian is like the mutual fund’s demat account.
Distributor: A distributor acts as an intermediary between the mutual fund and the investor. He helps the investor choose the right fund as per the investor's objectives. Mutual fund units can be distributed by only AMFI registered, certified distributors.
AMFI: The Association of Mutual Funds in India(AMFI) is a body dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders.
SEBI: SEBI is the market regulator in India which, apart from other functions, overseas the functioning of the entire Mutual Fund industry with the objective of protecting the interest of investors.