Structure of the Mutual Fund

The mutual funds investors are spared these concerns. That is because, with mutual funds, the asset management company-trustee-sponsor relationship works in the investor's favor. Mutual funds in India function under a 3-tier structure. The promoter or sponsor sets up the mutual fund, but does not exercise direct control over it. The sponsor must first appoint trustees. The trustees have a critical role to play as they are directly responsible to the investors/unit holders in the mutual fund. The trustees in turn appoint the asset management company (AMC). The AMC conducts the business of managing the day-to-day administration and fund management activities as also marketing and sales.

Mutual funds receive money from the public for investments; the regulatory authorities have to ensure that the investors' rights and interests are protected. If mutual fund promoters and fund managers are given a free hand, there is every possibility of the interests of investors being ignored. A fund promoter may prefer to invest in companies which he is associated with. Internal control and risk management systems may be ignored. Areas of potential trouble are many.

The best way to avoid such problems is to separate ownership of the mutual fund, management of the fund organization and investment management from each other. To increase transparency and professional management, the functions and responsibilities of each should be well defined. Finally, to ensure objectivity in decision making, independent persons should be inducted in organizational and fund management.