Mutual Funds as Trusts

A mutual fund in Indiaconstituted in the form of a Public Trust created under the Indian Trusts Act, 1882. The fund sponsor acts as the settler of the trust, contributing to its initial capital and appoints a Trustee to hold the asset of the trust for the benefits of the unit holders, who are the beneficiaries of the trust. The fund then invites investors to contribute their money in the common pool by subscribing the units issued by various schemes established by trust units being evidence of their beneficial interest in the fund.

Trustees: Trustees are board members of the mutual fund trust. They should be persons of good capability and standing and should not have been convicted for any economic offence. At least two thirds of the trustees shall be independent, or in other words they should not be associated with the promoters. No person can serve as the trustee of more than one mutual fund, unless he is an independent trustee. Trustees can be individuals or companies.

Trustees are responsible for the overall management of the mutual fund. They hold all assets of the mutual fund on behalf of its investors and it is their job to ensure proper management of such funds. Trustees are not allowed to manage the funds or take investment decisions themselves. Their responsibilities include appointment of fund managers, ensuring all legal compliances, appointment of auditors, establishment of internal controls, supervision of fund management, etc.

Trustees are required to carry out frequent checks on the activities of the fund and its managers. They are also required to report about the activities to SEBI, once every six months. A compliance officer should be appointed by the trustees to ensure that all legal provisions are adhered to.

Independent Trustees : Mutual fund trusts are required to have a majority of independent trustees on the board of trustees. The independent trustees are appointed to ensure that the promoters do not exert any influence on the decisions of the fund managers and that the best interest of investors is the guiding principle in all investment decisions.

Promoters can get away by appointing their own men as independent trustees. Therefore, it is important that the independent trustees are individuals of known integrity and competence. Ideally, they should be individuals with considerable corporate experience at the director board level and who are known to have an independent mind.