Mutual Funds are Regulated and Transparent

The Securities and Exchange Board of India (SEBI) heavily regulates mutual fund companies in India and ensure mutual fund investment safety. SEBi has a lot of regulations and frameworks that mutual fund companies must comply with to operate successfully in India.

All these policies are in place to protect the investor's money and interest. Apart from SEBI, India also has the Association of Mutual Funds in India (AMFI) that deals with investor grievances to ensure that no investor faces any problems when investing.

 

Key Regulations Governing Mutual Funds

Several rules and guidelines ensure that mutual fund investment security in intact:

• Minimum Investor Base: As per SEBI's guidelines, each mutual fund needs several investors to go public in the investment markets.
• Diversified Portfolios: These are supposed to spread risks by diversifying investments in various types of assets and securities within the same class of assets. In this way, the unsystematic risks are reduced.
• Prohibitions on Borrowing and Cash Holdings: Mutual funds are not allowed to borrow. They are allowed to have cash holdings only in scheduled banks, which minimizes risks arising from financial instability.
• Group Investment Restriction: To avoid conflict of interest, mutual funds are not allowed to invest more than the prescribed limit in securities of the group companies of their sponsor.

 

Mutual Fund Companies Follow a Trust-Based Structure for Security

Mutual funds are trusts, which means an extra layer of protection for investors. Here is how the structure takes care of mutual funds safety:

 

1. Sponsor

A sponsor is the one who establishes the fund. Establishing a mutual fund requires a very strict financial and background test. The sponsor can either be an individual or an organization and must contribute at least 40% of the total net worth of the mutual fund that they intend to establish.

 

2. Board of Trustees

2/3 of the people on the board of trustees are independent and make decisions unanimously without consulting or telling anybody. Such a system prevents all unfairness and biasedness toward any particular investor or group of investors, ensuring mutual fund investment safety.

 

3. Asset Management Company (AMC)

AMC companies have fund managers that invest investors' money in their funds and manage the complete portfolio. They try to make as many returns as possible on investors' money but are always under SEBI's strict regulations to offer mutual funds safety.

 

4. Custodian

The last body in this trustee system is the custodian. SEBI registers custodians based on certain internal parameters. Custodians register with banks to make all transactions and dealings transparent and honest.

 

Conclusion

The mutual fund industry operates under a highly regulated framework with well-defined processes, so your investments are safe. The only risk you take is the inherent market risk accompanying all market-linked investments. Scams or fraudulent schemes are virtually ruled out under the watchful eye of SEBI and AMFI.