Comprehensive Guide to Starting a Mutual Fund Company in India in 5 Steps

What are Mutual Fund Companies?

Starting a mutual fund (MF) company in India is an ambitious and potentially rewarding endeavor, given the country’s growing financial markets and investor base. Here’s a comprehensive guide on how to start a MF company in India, based on the regulatory requirements set by the Securities and Exchange Board of India (SEBI) and other essential steps.
A MF company pools money from various investors to invest in stocks, bonds, and other assets. These companies are managed by professional managers who make investment decisions to grow the investors’ money and provide returns based on the fund’s performance. Each investor owns a portion of the holdings proportionate to their investment.

How to Start a Mutual Fund Company?

In order to start a MF company one must fulfill the following eligibility criteria:

• Must have been engaged in financial services for at least five years.
• The company’s net worth for the immediate previous year must exceed the capital contribution required for asset management establishment. Additionally, the net worth must have been positive for each of the past five years.
• The sponsor should have a profit (excluding depreciation, interest, and tax) in at least three out of the last five years, including the fifth year.
• Must comply with SEBI regulations.
• The company must be incorporated as a Trust under the Indian Trusts Act, 1882, and approved by SEBI as a mutual fund.
• Technological Infrastructure: Necessary infrastructure for fund management, customer service, and operations.
• Sound knowledge and expertise in financial markets, investment management, and regulatory compliances.

Registration of Mutual Fund company in India

To get a certificate of registration from SEBI, the applicant must meet the following necessary requirements:

• The sponsor must have a track record of fairness and honesty.
• Must demonstrate positive net worth for the past five years and contribute at least 40% of the Asset Management Company’s net value.
• The sponsor should be free of fraud and never have been convicted of a crime involving moral turpitude.
• Must include and submit the Memorandum of Association (MOA) and Articles of Association (AOA) for the asset management business and trustee company.
• A trustee must be appointed to oversee the mutual fund’s operations.
• Role of Asset Management Company (AMC) in Mutual Fund: An AMC must be appointed to manage the mutual fund’s money and operations, requiring a net worth of INR 5 crore.
• Custodian: A custodian must be appointed for the safekeeping of securities.

Documents Required

The following is a detailed breakdown of the paperwork required to register a mutual fund company:

• Form A: This initial registration form must be filed with a non-refundable fee of INR 5 lakhs. Form A serves as the primary application document for SEBI registration.
• Detailed information about the promoter firm or its affiliate, especially if listed on a stock market, including financials, organizational structure, and relevant affiliations.
• A statement confirming that the directors or administrative officials linked to the sponsor firm have not been found guilty of fraud or crimes involving moral turpitude.
• The trust deed must outline the terms and conditions of the mutual fund, and a board of trustees, comprising at least two-thirds independent individuals, must be established to oversee the fund’s operations.
• The MOA and AOA for the AMC and the Trustee Company must be submitted as part of the registration process.
• A certificate from a Chartered Accountant confirming the financial details and net worth requirements.
  • The sponsor has donated 40% of the AMC’s net value.
  • AMC has a net worth of INR 10 crore or more
• Detailed information about the office location, organizational chart, HR profiles, and the nomination of a custodian.
• Applicants must give all required information or respond to any inquiry addressed by SEBI throughout the registration procedure within 30 days of contact.
• The certificate of registration is provided in Form B if the applicant is satisfied that it is complete in all respects, subject to the payment of a registration fee of INR 25 lakh.
• In circumstances when the sponsor does not meet the eligibility criteria and the application is incomplete, the authority has the discretion to reject the application and explain why.
• Additional Information:
  • List of group/associate companies registered with SEBI.
  • Details of registration of foreign sponsors with regulatory agencies abroad.
  • Instances of regulatory violations and penalties, if any.
  • Declaration regarding no involvement in fraud or economic offenses.
  • Registration details with RBI for Banking or Non-Banking Financial Companies, if applicable.
  • Details of directors or employees associated with entities penalized by SEBI.
  • Business plan and sponsor’s commitment to provide additional capital if required.

Steps to start a mutual fund company in India

1. SEBI Approval
The first step involves applying for SEBI approval and obtaining a certificate of registration. The application must demonstrate compliance with all regulatory requirements and include the necessary documentation. Upon approval, the sponsor must ensure that there is sufficient operational capital to sustain the business.

2. Incorporate as LLP
Investment businesses that are registered with the Securities and Exchange Commission are known as mutual funds. For mutual funds, the SEC has tight requirements and provisions, such as maintaining adequate capital to compensate investors for cashing in shares and making relevant information publicly available. To start a mutual fund company, an individual must incorporate a company in the form of a Limited Liability Partnership (LLP).

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3. A financial advisor
Securing approval for institutional investment management is crucial. Form ADV, used for various state registration requirements, must be submitted, detailing the size of portfolios to be managed. For portfolios exceeding $1 million, Form 13F must be filed, providing information on the fund’s transactions and value.

4. Arrangements for Funding
Fees and operational expenditures are included in the mutual fund’s operating expenses. The most expensive expenditure of every mutual fund company is attracting the investor’s money to construct a portfolio. A tiny startup cost might be extremely low, but to be a lucrative corporation, a person requires a large portfolio.

5. Finding a Partner
Any shared trust can partner with a mutual fund to offer a board of directors, insurance, and regulatory compliance. These firms assist small and new mutual fund companies to become more competitive, and mutual fund managers are free to make their own decisions.

FAQs

What is the structure of a Mutual Fund Company?

Mutual Fund company’s structure is three-tier which includes a sponsor, the trust and trustee, and the last is the asset management company. All of them have individual roles to play in a MF company. For instance, the sponsor initiates the fund in the company and the AMC plays the role of the investment manager.

Who controls mutual fund in India?

The Securities and Exchange Board of India (SEBI) is the ultimate authority to control mutual fund regulations in India. To start a mutual fund company, compliance from SEBI is mandatory.

How to register a Mutual Fund company?

Form A should be filled by the Sponsor and accompanied by non-refundable application fees INR 5 Lakh. This form has to be send to SEBI for getting registered. The required documents should be attached with the form.