themselves or in association with a corporate entity establishes a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI) for approval. After SEBI approval, a Public Trust is created by the sponsor under the Indian Trusts Act, 1882. As Trusts in India do not have a legal identity, the Trust can't enter into contracts on its own. For this purpose, authorized Trustees are appointed to act on behalf of the Trust. The instrument of trust must be in the form of a deed between the Sponsor and the trustees of the mutual fund registered under the provisions of the Indian Registration Act. Registration of the Trust with SEBI leads to the formation of mutual funds. After this, the Trust is known as a mutual fund. It should be noted that the Sponsor and the Trust are separate entities.

The Trustee’s role is only to act as internal regulators of mutual fund monitoring whether the money is managed according to its objectives. The Asset Management Company (AMC) is appointed by the trustees, to manage funds mobilized by selling mutual fund’s units. The Board of Directors of AMC’s must have at least 50% of independent directors. The AMC must also be approved by SEBI. The functions of AMC fall under the supervision of its Board of Directors and the direction of the Trustees and SEBI. AMC floats new schemes on behalf of the Trust and manages these schemes by buying and selling securities. To do this, the AMC has to adhere to the regulations and rules and prescribed by SEBI and according to the Investment Management Agreement, it signs with the Trustees.

Regulation of mutual funds

Securities and Exchange Board of India (SEBI) Primarily regulate the Mutual funds. SEBI which is also the supreme regulator of capital markets and intermediaries formulated the Mutual Fund Regulation in the year 1996. It has under its purview the Issue and trade of instruments in the capital market. Mutual funds are regulated apart from In addition to SEBI, by the Companies Act, the Stock exchanges, Indian Trust Act, Reserve Bank of India (RBI), and the Ministry of Finance. Sponsors of bank-sponsored mutual funds are regulated by RBI, especially those funds that guaranteed returns. Mutual funds must take approval from RBI for providing a guaranteed returns scheme. SEBI and the appellate authority under its regulations, and RBI is supervised by the Ministry of Finance. Mutual funds have the choice to appeal to the Ministry of finance against SEBI rulings.

Some of the regulations for mutual funds

AMC of Mutual Fund has to be set up having 50% independent directors, and a separate board of trustee companies having a minimum 50% of independent trustees and custodians to ensure a close relationship between fund managers, trustees, and custodians. As trustees have the custody of assets and AMCs manage the funds, the risk is counterbalanced, as both can keep watch on each other.

SEBI looks into the track record of a Sponsor, their integrity in business transactions, and financial soundness before granting permission. The particulars of schemes are required to be vetted by SEBI. A code of advertisement must be adhered to by the mutual funds.

Mutual funds must have a minimum corpus of rupees 50 and 20 crores respectively for an open-ended scheme, and closed-ended scheme. Mutual funds must invest the funds raised from the saving schemes within nine months thereby protecting the mutual funds from the disadvantage of investing funds in the bullish market and suffer price erosion of NAV later. Mutual funds can invest a maximum of 25%of the corpus in money market instruments during the first six months of closing the funds and a maximum of 15% after six months to meet short-term liquidity requirements.

Mutual funds are inspected by SEBI every year to ensure their compliance with the regulations.