Question

how a mutual fund is structured. Make sure to explain why mutual fund fee's may or may not be worth the cost to you. Comment on why you might want to invest in a mutual fund instead of a good stock. Do not take any short cuts answering this question this week, I want detail. This is the investment tool that most individuals use. The companies provide detailed information for you to review every month. There are many types of mutual funds and various costs. Some mutual funds are conservative some mutuals funds are aggressive.

Answer 1

Let’s first understand what Mutual funds are?

Mutual fund is known for the pooled investing concept. People/investors who shares the common financial goals. The money which is received by the investors are invested in the capital market. For example: Shares, debentures, and other securities. Professionals manage it. The income earned through these investments by its unit holders in proportion to the number of units owned by them.

HOW A MUTUAL FUND IS STRUCTURED?

As we have understood above, mutual funds involve managing money of investors’ it is regulated by SEBI (Securities and Exchange Board of India).

The structure of mutual fund is three-tier. They are as below:

1. Sponsor
2. Trustee
3. An Asset Management Company(AMC)

Fund Sponsor: The sponsor is the main body that establishes the mutual fund. The sponsor can be compared to the promoter of a company. A sponsor must approach SEBI to seek permission for a setting up a Mutual Fund and setting up an AMC under the Companies act 1956 while getting the trust registered with SEBI. It is the responsibility of the sponsor to appoint the trustee with the approval of SEBI

Guidelines for the fund sponsor as per SEBI:

1. The sponsor must have experience in financial services for a minimum of 5 years.
2. A Sponsor also must have made profits in at least three of the five years including the latest year. During the same period, it is also important that the sponsor has had a positive net worth.
3. It should be contributing a minimum of 40 per cent net worth of the AMC
4. is also important that the sponsor has a good record of accomplishment of fairness and integrity in all its transactions

TRUSTEE: Trustee be primary guardians of fund and asset. The role of the trustee is to make sure that the interest of the shareholders is protected and check if the same is aligned with the regulation of SEBI. Two ways can form trustees: Either, the sponsor should appoint four trustees or establish a trustee company with at least four independent directors. Additionally, 2/3 of the trustees are independent persons who are not associated with the sponsored in any manner.

Asset Management Company (AMC): AMC is the investment manager of the trust. It takes care of the day-to-day operation of the mutual fund and managing the investors’ money as well. All the activities of the AMC must be in line with SEBIs rules and regulations

CUSTODIAN: The custodian has the custody of the all the shares and various other securities bought by the AMC. They manage the investment account of the Mutual Fund, ensure the delivery and transfer of the securities. Custodian also collect and track the dividends & interests received on the Mutual Fund investment.

MUTUAL FUND FEE

Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns. These expenses are not directly billed to the investors but are paid out of fund asset. These fees appear on the prospectus under, “Annual fund operation expense”.

Mutual funds are an expensive way to invest your money. The industry justifies its fees by showing that it earns higher returns. Investing in Mutual Fund is not as simple as it is made out to be if the investors are not certain about the market mutual funds are good option to invest despite of the charges.

MUTUAL FUND OVER STOCK

When an investor invests in mutual funds over stocks, they look at few factors and those are risk, time to research your investment and costs.

1. Stocks are riskier than mutual funds.
2. Mutual funds are managed by professionals. Since it is managed by professionals the risk is reduced.
3. Many people think that they must invest more time in researching which stock to buy or not. Mutual funds don’t require much time to research.
4. Brokers charge you when you buy or sell the stock but those fee can vary depending on the services. Whereas mutual funds charge you annual management fees.