MUTUAL FUND SETUP

While discussing the constitution and management of mutual fund, we come across three main parties namely the sponsor, the trustee and the asset management company. Sponsor means a body corporate who, acting alone or in combination with another body corporate establishes a mutual fund after completing the necessary formalities. Trustee means a person or company who holds the property of the mutual fund in the trust of and for the benefit of the unit holders. Asset Management Company means a company formed and registered under the Companies Act 1956, to manage the fund’s asset/portfolio.
SETTING UP A MUTUAL FUND
Any body corporate with a sound track record in the relevant field of financial services for a relevant period of 5 Yesrs can set up a mutual fund in form of a trust. The Sponsor Company shall then appoint a Board of Trustees by executing a trust deed in favour of the Trustees. The Trustees thus appointed are accountable for and are the custodian of the property of the respective schemes and shall hold the same in trust for the benefit of the unit holders in accordance with regulations given by SEBI and the instruments of the trust. The sponsor or, if so authorized by the trust deed, the trustee shall appoint an Asset Management Company, who is approved by the Board to manage the affairs of the mutual fund and operate the schemes of the fund. Besides this, the mutual fund shall have a custodian who safekeeps the assets of the funds and who is not in any way associated with the asset management company.
MUTUAL FUND COSTS
Mutual fund costs fall in two broad classes:
1. Sales charges known as loads and
2. Expenses incurred in the fund operation.
The expenses incurred in the operation of fund can further be classified into
Management Fee: It includes investment advisory fees and administrative expenses and is usually expressed as a percentage of the net assets of the scheme.
Service Fees: It covers the fund’s advertising, distribution and marketing expenses, and is also a form of commissions paid to brokers called trailing commission. The operating expenses are assessed annually while loads are one-time charges.
Front - End Load: Front End load refers to the selling expenses charged at the time of the purchase of a mutual fund unit.
Back - End Load: Back end load refers to the discount offered by the fund to the repurchase price at the time of repurchase of units by the fund.
All funds do not impose loads but all of them have operating expenses (costs) that are deducted from fund earnings. The fund managers make efforts to reduce operating expenses because if the expenses come down, the returns to the investors can go up.