People have a general perception that their money is completely safe in bank accounts and fixed deposits. This originates from the fact that banks are regulated by the government, and RBI keeping a watch on all banks adds more strength to this belief.
But, when you ask the same question about mutual fund companies, most people are bound to answer in negative. This apprehension is not surprising, as most of us don’t really understand how mutual fund companies work and manage our money.
What if we told you that mutual fund companies are also regulated under stringent norms and that they work under certain set guidelines, similar to banks. Would you believe us?
Well, read on to understand this better:
Mutual fund companies are well regulated
All mutual fund houses operate under stringent regulations to protect every investor’s interests. These regulations are put in place by SEBI (Securities and Exchange Board of India), a government agency responsible for the supervision and functioning of the capital markets.
SEBI makes policies to regulate the industry. Apart from this, SEBI issues certain guidelines from time to time for all fund houses and keeps their operations under its check. In case of discrepancies, there are various penal provisions which are applied on the fund houses.
AMFI (Association of Mutual Funds in India), on the other hand is a statutory body that addresses the grievances of mutual fund investors. Together, they strive to keep the functioning of the industry transparent and ethical.
Rules and Regulations over mutual fund companies
Every mutual fund company is required to abide by a set of regulations imposed by SEBI.
It also conducts regular audits on these fund houses to make sure there is a discrepancy in the functioning of these funds.
Let us look at some of the major regulations imposed by SEBI to ensure investor’s protection:
Minimum number of investors per scheme: SEBI requires each scheme to have a minimum number of investors because funds work on the principle of pooling resources and spreading or sharing risks across a large number of investors. Thus, a minimum number ensures that a fund works as a collective investment vehicle rather than an individually tailored asset.
Minimum portfolio diversification rules: A mutual fund scheme must diversify across assets and securities in the same asset class. This is essential to reduce the internal or unsystematic risks associated with investments.
Other restrictions: Mutual funds are not allowed to take any loans. Moreover, they are also restricted to hold cash only in scheduled banks, not in any other bank. And to ensure that the sponsors do not use investors funds to strengthen their other group companies, SEBI restricts a mutual fund to invest in a securities listed by an associate or group company of the sponsor.
A structure that safeguards the investor’s interest at each level
Another thing that makes mutual funds safe for your investment is the structure in which a fund is built. This structure of a mutual fund company, as determined by SEBI, requires a fund to designed in the form of a trust. It will be helpful if we look at this structure and understand how it adds safety to your investment.
Sponsor: Firstly, there is a sponsor who is a person or a body which establishes the fund. They are required to contribute at least 40% to the net worth of a mutual fund. It is important to note that a license to start a mutual fund is only given to a sponsor after diligent background checks and ascertaining their financial capabilities.
Board of Trustees: A mutual fund company is set up as a trust, wherein two-thirds of the trustees have to be independent persons not associated with the sponsor in any manner. They are responsible for protecting the investor’s interests and make sure that the decisions at the fund are taken after mutual consent of all stakeholders.
Asset Management Company: They are the professional fund managers hired by the trust to look after the investment. They invest the money in various securities and make sure there investments are profitable and provide healthy returns to the investors. They also look after the administrative functions of a fund.
Custodian: By law, all mutual funds are required to protect their portfolio securities by placing them with a custodian. All investments made by AMC’s are done through qualified custodians, like banks. These custodians too are registered with SEBI and answerable to them. This allows complete transparency in terms of transactions and holding of all fund houses.
So, as we saw, a defined structure along with stringent guidelines to abide by, have helped the mutual fund industry evolve a lot over the years. This has given investors an opportunity to make most of this investment avenue.
So, by looking at the structure and regulations which a mutual fund company has to abide by, we can say with 100% surity that your investment in a mutual fund is safe and no fund will run away with your money. And as you would have heard that mutual fund investments are subjected to market risks, so the only risk you take on your investment is the risk of fluctuations in money market. There is no risk of scams or fake schemes in mutual funds which will make you lose your money.
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