Summary of "NISM VA Mutual Fund Chapter 3 - Legal Structure of Mutual Fund | 2024 - New Syllabus | #nism #nism5a"
Summary: NISM VA Mutual Fund Chapter 3 - Legal Structure of Mutual Fund | 2024
Key Topics Covered
- Legal and organizational structure of mutual funds in India
- Roles and responsibilities of sponsors, trustees, Asset Management Companies (AMCs), custodians, and Registrar & Transfer Agents (RTAs)
- Eligibility criteria and regulatory compliance requirements for mutual fund entities
- Overview of the Association of Mutual Funds in India (AMFI) and its role
- Importance of transparency, investor protection, and compliance in mutual fund operations
Finance-Specific Content
1. Mutual Fund Legal Structure
- Mutual funds in India are established as trusts under the Indian Trust Act, 1882, not as companies.
- Investors/unit holders are the beneficiaries of the trust.
- The trust structure ensures that all assets and operations are conducted for the benefit of investors.
2. Key Entities in Mutual Fund Structure
Sponsor (Promoter)
- Initiates the mutual fund business, invests initial capital, and applies for SEBI registration.
- Must have a minimum of 5 years in financial services business with profitability in at least 3 of those years.
- Must contribute at least 40% of the net worth invested in the AMC.
- Minimum initial contribution for New Fund Offer (NFO): Rs 15 lakh or 1% of the NFO size (whichever is lower).
- Must be physically and mentally fit and maintain a clean record.
Trustees
- Appointed by the sponsor with SEBI approval.
- Responsible for safeguarding investors’ interests and ensuring legal compliance.
- Must have a board of directors if a company is appointed as trustee.
- At least one-third of trustees must be independent (no relation to sponsor).
- Trustees regularly interact with compliance officers and file half-yearly reports with SEBI.
- Monitor fraud, irregularities, and ensure ethical conduct.
Asset Management Company (AMC)
- A Non-Banking Financial Company (NBFC) responsible for fund management, operations, sales, and marketing.
- Appointed by either the sponsor or trustee with mutual approval.
- Eligibility criteria: minimum net worth of Rs 50 crore.
- AMC directors must have professional financial experience and maintain integrity; at least 50% of directors must be independent.
- AMC can be terminated by:
- Majority trustees’ decision, or
- 75% investor approval reported to SEBI if AMC malpractices occur.
Custodian
- Holds and safeguards the assets of the mutual fund (equities, bonds, real estate, gold, etc.).
- Must be registered under the Custodian Regulations Act, 1996.
- Tracks corporate actions such as dividends, bonuses, rights issues.
- Responsible for delivery and receipt of securities during purchase and sale transactions.
Registrar & Transfer Agent (RTA)
- Maintains investor records: purchases, sales, redemptions, switches.
- Prepares and sends account statements to investors.
- Can be appointed by AMC but is not mandatory.
- Registered with SEBI.
3. Investment Instruments and Schemes
Mutual funds offer various schemes investing in: - Equity (major portion in stocks like Reliance, Tata, etc.) - Debt (commercial papers, treasury bills) - Gold - Real estate
Investment allocation depends on scheme type and risk profile.
4. Regulatory and Compliance Framework
- SEBI regulates mutual funds, ensuring investor protection and transparency.
- Trustees and compliance officers work closely to maintain KYC, document verification, and asset holding compliance.
- AMFI (Association of Mutual Funds in India) promotes investor awareness, financial literacy, and ethical standards.
- AMFI is a self-regulatory organization but not a statutory regulator; it works alongside SEBI and RBI.
- Mutual fund distributors must pass certification exams and adhere to a code of conduct; AMFI can cancel distributor registration for misconduct.
5. Depositories and Dematerialization
- Shares and securities are held in electronic form via depositories:
- NSDL (National Securities Depository Limited)
- CDSL (Central Depository Services Limited)
- Demat accounts store securities digitally, enhancing safety and convenience.
Methodology / Framework Highlights
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Mutual Fund Setup Process:
- Sponsor invests capital and applies for SEBI registration.
- Sponsor appoints trustees and signs a Trust Deed.
- Trustees appoint or approve AMC.
- AMC manages operations, fund management, and customer service.
- Custodian safeguards assets.
- RTA maintains investor records and processes transactions.
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Eligibility Criteria:
- Sponsor: 5 years financial services experience, profitable 3 out of 5 years, minimum capital contribution (40% net worth).
- AMC: Minimum net worth Rs 50 crore, qualified directors with financial expertise.
- Trustees: Independent majority, no conflict of interest with AMC or sponsor.
-
Termination of AMC:
- By majority trustees or by 75% investors’ approval via SEBI.
-
Investor Protection Measures:
- Compliance officers ensure KYC and regulatory adherence.
- Trustees monitor and report irregularities.
- AMFI promotes transparency and ethical practices.
- Distributors regulated under AMFI code of conduct.
Key Numbers & Timelines
- Sponsor capital contribution: Minimum 40% of net worth invested in AMC.
- Sponsor minimum initial investment in NFO: Rs 15 lakh or 1% of NFO size (whichever is lower).
- AMC minimum net worth: Rs 50 crore.
- Trustee reporting: Half-yearly reports to SEBI.
- AMC termination requires approval by majority trustees or 75% of investors.
Disclaimers
The content is educational and aligned with NISM Mutual Fund certification syllabus. It is not financial advice; viewers should conduct their own due diligence before investing.
Presenters / Sources
- Presenter: Finance with Nobita (YouTube channel)
- The video is part of a series covering the NISM VA Mutual Fund certification syllabus, Chapter 3 focused on legal structure and organizational setup of mutual funds.
This summary captures the finance-specific and regulatory aspects of the legal and organizational structure of mutual funds as presented in the video.
Category
Finance
