Mutual funds are regulated by SEBI( Securities and Exchange Board of India). SEBI regulates mutual funds as 1996 Mutual fund regulation. SEBI is also the regulator for wider capital and securities market in India.SEBI was formed in 1988 as a statutory body and drives it powers from SEBI act 1992.
There are a lot of options to invest your money in India. Mutual funds, however, are considered one of the best and highest yielding long-term investment plan. In simple terms, Mutual Funds can be described as a basket of securities in which a pool of investors with common financial goals invests their money. These investments are diversified in different sectors like shares, debt securities, and money market securities or all combined. Mutual funds regulated by the Security and Exchange Board of India (SEBI) provide secure saving option managed by professional account managers.
The regulatory authority of Mutual Funds
SEBI, the government body who regulates mutual funds in India, issued guidelines for the mutual funds for the first time in 1993. The regulations were fully revised in 1996. The main aim of the Mutual Fund regulatory body in India is to protect the interests of the investors. SEBI often issues guidelines for the Mutual Funds, depending on the situation in the market. The Mutual Funds are prompted by either public or private sector entities including the foreign entities are governed by the regulations issued by SEBI.
The regulations stated in the 1996 guidelines
As per the Mutual Funds regulations 1996, all mutual funds must register as trusts under the Indian Trust Act 1882. In order to run the Mutual Fund, the company has to set up a separate asset management company commonly known as AMC. The regulations state that the net worth of the parent company of the AMC must be more or equal to Rs.50, 000,000/-
If the Mutual Fund is dealing with money market exclusively, it has to register with the RBI as well. SEBI has the authority to penalize a mutual fund founded a guilty of not following the norms. All the mutual funds should be registered with SEBI and the government has also set up a separate regulatory agency for Mutual Funds as well which is known as the Association of Mutual Funds in India or AMFI.
The basic structure of a Mutual Fund
The very first person or company in the hierarchy is the sponsor. The sponsor must contribute a minimum of 40% of the total value of the investment managed by the mutual fund. It should be registered with SEBI as well. The Trust is the next level in the hierarchy. A mutual fund is registered as a trust as mentioned above. Every trust should have a board of Trustees who are responsible for safekeeping the interests of the investors. It is the duty of the Trustees to appoint the AMC. The AMC has to get an approval from SEBI to start its functions.
At any given time, AMC’s net worth should remain equal to or above 10 Crores. The hierarchy continues with custodian which is basically a trust company, bank or a financial institution that is responsible for holding and safeguarding the securities owned by the Mutual Fund. The Custodian may also act as a transfer agent. It is the responsibility of the registrar and transfer agent to handle communication with the investor. They also update the investment records regularly.
Investment in mutual funds is mostly secure, but it is in the investors’ interest to check the track record of the mutual fund before investing in it. Also, the investor should prefer a diversified mutual fund to gain long term benefits.