Are Mutual Funds Safe?
If you look closely at the fine print on a mutual fund offer document you will find a warning that mutual funds are subject to market risk. This is because, unlike bank fixed deposits, mutual funds are not guaranteed by the government or a deposit insurance company.
The good news is that your money in mutual funds is extremely safe and you can rest assured that you won’t wake up to find your funds have disappeared. But are mutual funds really safe?
In this article, we will take a look at how safe are mutual funds in terms of their safety with regard to the company running away with your money. We will also look at how safe are mutual funds in terms that the investments are safe with regards to capital protection and fixed returns.
To begin with, let’s understand the different players involved in a mutual fund(Trustee, AMC, CUSTODIAN, RTA, SEBI, AMFI)
Mutual Fund Organization Structure
Mutual Fund Organization Explanation
A mutual fund is managed by an Asset Management Company (AMC) or Mutual Fund company, that is responsible for making investment decisions on behalf of its investors. The AMC is regulated by the Securities and Exchange Board of India (SEBI).
The Sponsor appoints a Trustee, who is responsible for safeguarding the interests of the investors.The trustee is responsible for ensuring that the mutual fund company complies with all applicable laws and regulations and that the investments made by the mutual fund are in line with the investment objectives and policies outlined in the mutual fund’s trust deed.
The Custodian is another important player in the mutual fund ecosystem. The Custodian is responsible for holding the securities in the portfolio of the mutual fund. This helps in reducing the risk of fraud or misappropriation of securities by the AMC.
“Securities” refer to the financial assets (such as stocks, bonds, and other types of securities) held in safekeeping for the mutual fund. The custodian is responsible for holding these securities and ensuring that they are safe from theft, loss, or damage.
(In the series “Big Bull,” Harshad Mehta visits the custodian to report missing shares of investors that were sold by his friend Bhusan. The role of the custodian is to ensure that such scams do not occur with investors).
The Registrar and Transfer Agent (RTA) is the entity responsible for maintaining the records (Account statements, investment amounts, redemption requests, dividend payouts, and other related documents) of the investors in the mutual fund. The RTA processes all transactions related to buying or selling of units in the mutual fund. The RTA also ensures that dividend payouts and redemptions are processed in a timely and accurate manner.
They also track the Net Asset Value (NAV) of mutual fund schemes on a daily basis and provide the same to investors, AMCs, and other stakeholders.
Here are 5 RTA (Registrar and Transfer Agents) in India:
- CAMS (Computer Age Management Services)
- Karvy Fintech Private Limited
- Sundaram BNP Paribas Fund Services Limited
- Franklin Templeton Asset Management (India) Private Limited
- KFin Technologies Private Limited
SEBI (Securities and Exchange Board of India) is the regulatory body that oversees the functioning of the mutual fund industry in India. It sets the rules and regulations that all mutual fund companies must follow to ensure transparency, fairness, and investor protection. These rules and regulations will be monitored by trustees in order to ensure that mutual fund companies are following them.
AMFI (Association of Mutual Funds in India) is the industry body that represents all registered mutual funds in India. It acts as a self-regulatory organization and works closely with SEBI to ensure that mutual funds operate in a fair and transparent manner.
Daily data is sent from the RTA to the AMC, which is then forwarded to the custodian for reverification. This data includes all investor transactions, such as purchases, redemptions, and switch transactions. It also includes information on the securities held by the mutual fund.
Now, let’s understand how these players work together if an investor invests Rs. 100 in a mutual fund.
The AMC will use this money to invest in a portfolio of securities based on the investment strategy outlined in the offer document. The Custodian will hold these securities in custody and ensure that all transactions related to these securities are settled in a timely and accurate manner. The Trustee will monitor the performance of the fund and ensure that the AMC is adhering to all regulatory guidelines. The RTA will maintain the record of the investor and process all transactions related to buying or selling of units.
If there is a mismatch in the data, it can lead to discrepancies in the NAV (Net Asset Value) of the mutual fund, which can impact the returns earned by investors. To avoid this, there are several checks and balances in place, including regular audits and reconciliations of investor data and securities holdings. In case of any discrepancies, corrective action is taken to rectify the issue and ensure that investor interests are protected.
So, Whenever you invest in mutual funds the transaction is tracked and verified by seven different entities separately.
- RTA maintains your transaction records, the Custodian oversees the stock transactions, RTA checks the NAV as per the stock transactions from AMC. This data is then passed on to AMFI, which is further circulated on all websites. All of this is overseen by SEBI.
It is impossible for any individual or company to bypass this framework of seven entities. Thus, mutual funds provide a secure investment option, and the chances of a scam happening in the mutual fund industry are minimal. Hence Mutual fund are safe.
In conclusion, the structure of Indian mutual funds is designed in such a way that it is difficult to scam in mutual funds. The presence of a Trustee, Custodian, RTA and AMC ensures that there are checks and surveillance at every stage of the investment process, thereby safeguarding the interests of the investors.
