MUTUAL FUND: Concept and Registration with SEBI

Mutual funds are one of the most accepted types of investment for the everyday investor. They are both simple to invest and easy to use. In another way, it can be termed as “Investing for Dummies”. In a Legal Terms, Mutual Fund is an investment security that allows the Investors, who share similar financial goals to pool in their savings. As a result, money combined is then invested into different Capital Market Instruments such as Debentures, Shares and many other securities.  After that, all the earnings from these investments, along with capital appreciation realized, is distributed among the unitholders in percentage to the number of units possessed by them. Therefore, a Mutual Fund is the most appropriate investment for an ordinary person, as it offers a chance to invest in a diversified and professionally dealt bunch of securities at a comparatively low price. Further, for Setting up of a Mutual Fund, Sponsors are required to apply Form A along with the prescribed non-refundable fee. After examination of the application, the applicant is required to fulfil some formalities along with the payment of Rs Twenty-Five Lakhs as Registration Fees. After that, a Certificate of Registration for Mutual Fund will be issued by the authorities. Moreover, the organization of Mutual Fund includes several entities like Unit holders, Sponsors, Trustees, Asset Management Company, Custodian, and Transfer Agent.

Workflow of Mutual Fund 

The flow chart below explains broadly about the working of a Mutual Fund:

Advantages of Mutual Fund

  • Professional Management
  • Convenient Administration
  • Diversification
  • Return Potential
  • Liquidity
  • Low Costs
  • Transparency
  • Choice of Schemes
  • Well Regulated
  • Tax Benefits
  • Flexibility

Types of Mutual Funds

Based on STRUCTURE

  1. Open-Ended Schemes
  2. Close-Ended Schemes
  3. Interval Schemes

Based on INVESTMENT OBJECTIVE

  1. Income Schemes
  2. Growth Schemes
  3. Money Market Schemes
  4. Balanced Schemes

OTHER SCHEMES

  1. Tax Saving Schemes
  2. Special Schemes
    • Sector Specific Schemes
    • Index Schemes

Registration of Mutual Fund with SEBI

Mutual Fund acts as a trust, which includes trustees, Sponsor, Custodian, and Asset Management Company (AMC). Trust is formulated either by a Sponsor or group of Sponsor, who is similar to the Promoter of a Company. For the benefit of the unitholders, trustees of the mutual fund hold its property. AMC (Asset Management Company) permitted by SEBI deal with the funds by investing them into various sort of securities. Custodian, who is registered with SEBI, holds securities of various Fund Schemes in its custody. Trustees are vested with the power of direction and superintendence over the Asset Management Companies. Further, trustees keep an eye on compliances of SEBI regulation and performance by the Mutual Fund.

Procedure for Registration of Mutual Fund includes filing of an application by the Applicant in Form A of the first schedule of the SEBI (Mutual Funds) Regulations, 1996 along with a non-refundable fee of Rs five lakh if he intends to Sponsor a Mutual Fund. After the examination of the application, Sponsors are required to fulfill the remaining formalities for setting up a Mutual Fund. Formalities include –

  1. Executing the Investment Management Agreement and Trust Deed,
  2. Setting up Board of Trustees/ Trustee Company including two-third of Independent Trustees,
  3. Appointing a Custodian,
  4. Incorporating the Asset Management Company (AMC)
  5. Contributing at least Forty per cent of the net worth of the Asset Management Company.

Certificate of Registration will be issued after the satisfaction of these conditions along with the payment of Rs Twenty-Five Lakhs as Registration Fees.

Key Points regarding Registration of Mutual Fund

  1. Needs to get it registered as Trust under the Indian Trust Act, 1882.
  2. Need to register a Separate Asset Management Company. Net Worth of the Asset Management Company must be Rs five crore.
  3. Investors of the Mutual Fund are named as Unit Holders.
  4. Bunch of securities are known as Portfolio.
  5. Mutual Fund is managed by the Fund Manager
  6. Net Asset Value (NAV) is the value of each unit.
  7. Asset Management Company is an organization that manages the investments.
  8. Sponsor should contribute at least forty per cent towards the net worth of Asset Management Company.
  9. Need to appoint a Custodian to keep custody of gold and gold-related items as per the regulations prescribed.
  10. Need to carry on financial service business for at least five years along with positive net worth.
  11. Applicant has to be fit and proper along with a soundtrack.
  12. Mutual Fund Activities should be one of the main objectives specified in the
  13. Memorandum of Association (MOA) of the Sponsor Company.

Costs Involved in Mutual Funds Registration

  1. Exit Load
  2. Expense Ratio
  3. Entry Load
  4. Distributor’s Commission

Prerequisites for Investing In a Mutual Fund Plan

  1. Demat Account with the Broker
  2. Bank Account
  3. Documents of Know Your Customer (KYC) needs to be enclosed
  4. Accounts Linkage with the Aadhar Card.

Checklist for the Required Documents

  1. A complete list of all the subsidiaries/ group companies/ associate companies registered with SEBI in any capacity along with their Registration Numbers. Also, whether any of its Sponsors, associated or group companies, are listed on any Recognized Stock Exchange.
  2. A complete list of instances of non-adherence and violation to any securities-related regulations enforced by any regulatory agency, whether based in India or abroad. Moreover, any kind of measure is taken in this regard.
  3. Registration Details of all the companies registered as the Non-Banking Financial Corporation (NBFC) or in any other capacity with the Reserve Bank of India.
  4. A declaration that the Sponsor Company or its Directors have not been found guilty of any misconduct, fraud etc.
  5. Two sets of both Memorandum of Association and Articles of Association of Asset Management Company and Trustee Company (i.e. one copy for the SEBI and another set for the Registrar of Company records).
  6. A comprehensive Business Plan.
  7. An exhaustive note regarding the Infrastructure employed by the Asset Management Company.
  8. An Auditor’s Certificate certifying that – The Sponsor has contributed Forty per cent to Asset Management Company’s Net Worth. Further, the Net Worth of the Asset Management Company is not less than Fifty crores.
  9. To sponsor Mutual Funds, approval from Reserve Bank of India (RBI) and other regulators are required.
  10. Executed copies of the Investment Management Agreement and Trust Deed.
  11. To provide Additional capital to AMC undertaking from the Sponsor is needed, till its operations breakeven to protect the interest of unitholders.
  12. Within thirty days from the receipt of communication from SEBI, the applicant has to submit all the required information, failing which the case me be deemed as closed.

Scheme Offer Document (SID)

Within six months from the date of issuance of observations by SEBI, the scheme should be launched. In case if this time period is extended, then it has to be filed again.

The Filing Fee for an Offer Document is 0.0005% of the amount raised in the new fund offer or by way of Private Placement subject to Minimum Two Lakhs and Maximum Fifty Lakhs.

Annual Fees Payable by the Mutual Fund and Asset Management Company

A Mutual Fund shall pay an Annual Fee before 15th April each year for every Financial Year from the year of registration:

  1. AUM (Average Assets under Management) up to ten thousand crores: 0.0015% of the AUM.
  2. AUM above ten thousand crores: 0.0010% of the portion above of ten thousand crores.

The above two requirements are subject to a minimum of Two Lakh Fifty Thousand and a maximum of One Crore. In case the Sponsor Company fails to comply with the eligibility criteria, SEBI may reject the application form and inform the applicant of the same.

Fees

All the Documents need to be duly executed and vetted along with a Non – Refundable Fee of Rs Five Lakhs and Registration Fees of Twenty Five Lakhs.