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To protect billions of rupees in assets in the complex mutual fund universe, a strong and trustworthy system is needed. The guardian of mutual funds who ensures their safety is the custodian, whose efforts often go unnoticed.
By May 2024, the mutual fund industry in India alone managed more than ₹58,91,160 crore worth of assets under management (AUM). This number shows how important custodians are for keeping investors’ trust and the market stable.
Who is the custodian in a mutual fund, and what is the role of the custodian in a mutual fund? What are the functions of the custodian in mutual funds? This article will answer these questions.
What is a custodian in a mutual fund?
Let’s explore who are fund custodian in mutual fund? A custodian acts as a bank for the mutual fund’s assets. Safekeeping the managed properties is an essential role in this job.
But who appoints custodians in mutual funds? In mutual funds, custodians are appointed by the board of fund trustees. Securities and Exchange Board of India (SEBI) regulates the registration process of Custodians of Mutual Funds in India.
A Mutual Fund Custodian means a person or entity who maintains custody and safeguards a fund’s assets independent of the fund manager.
Custodianship for mutual funds has been compelled by federal statutes. According to their rules, they had to segregate the assets of the fund, the manager of the fund, and the investment consultant or adviser. This action was taken to protect transparency and guarantee that power is allocated fairly.
Roles and responsibilities of a custodian in mutual fund in India
- Securing assets: The custodian serves as the guardian when it comes to mutual funds. They are in charge of safeguarding every stock, bond, and other investment that a business owns. Imagine them as the protectors of your investment valuables.
- Record keeping: The custodian maintains detailed records for each investor. They track who owns how many shares or units in the fund. These records help the fund house manage everything smoothly.
- Double-checking transfers: When shares or units change hands (like when you buy or sell), the custodian ensures it’s done correctly. They make sure the right investor gets the right stuff.
- Complying with rules: The SEBI sets the rules. The mutual fund custodian in India follows these rules to the letter. They report regularly and communicate as needed.
- Watching over investments: Custodians keep an eye on the firms where the mutual fund invests. For this to stay on course, they need to check reports, performance as well as activities.
- Handling redemptions: If you want to withdraw your investment, the custodian handles it. They deal with transaction fees and make sure you get your interest and dividends.
Custodian and banker of mutual funds in India
Let’s look at a list of mutual fund custodians in India. as of June 2024:
- Axis Bank Ltd
- BNP Paribas
- Citi Bank N.A.
- DBS Bank India Limited
- Deutsche Bank Ag
- HDFC Bank Limited
- ICICI Bank Limited
Benefits of having a custodian
- Building investor trust: Similar to how we rely on banks to safeguard our gold and money, the presence of a custodian gives mutual fund investors confidence in the security of their holdings. The public’s opinion of mutual funds will get better if they start relying on them more.
- Operational efficiency: Custodians in mutual funds settle transactions promptly and follow regulatory rules. This efficiency is good for investors and fund managers alike. It makes certain that investments move along without any problems or impediments.
- Risk protection: Mutual funds are inherently risky. Custodians manage risk by implementing proper processes. They stop fraud, uphold regulations, and guard against unwanted access.
- Accurate net asset value (NAV): One of a custodian’s duties is to ascertain the correct NAV or the asset value of a fund. Investors are aware of the true value of their investments once the NAV is accurate.
Bottomline
Custodians do much more than just protect assets; they’re also crucial for fostering trust and stability in the mutual fund industry. As the number of mutual funds increases, custodians will grow in importance. This illustrates their significance to the financial well-being of both investment managers and shareholders.
FAQs
Custodians do not provide their services for free. They charge fees to do things such as protecting assets, keeping records and completing transactions. When people purchase or sell units of a mutual fund, custodians act on their behalf during these transactions. It is also possible that they will impose a small fee per transaction, which can be considered equivalent to service charges. Custodians offer additional services like tax reporting, compliance, and risk management. These services may come with separate charges.
The securities like stocks and bonds making up the fund should be kept safe by the custodian. They prevent fraud or mishandling. In addition to keeping records, settling trades, and making sure rules are followed, this is part of their job. A fund administrator focuses on administrative tasks related to the mutual fund. They handle paperwork, maintain accurate records, and generate account statements. Fund administrators are responsible for daily operations, such as monitoring investor transactions and submitting reports.
The securities like stocks and bonds making up the fund should be kept safe by the custodian. They prevent fraud or mishandling. Their duties include keeping records, settling trades, and following the rules very closely. A broker is an individual who helps with selling or buying things. In case you wish to buy or sell securities within your mutual fund, brokers ensure quick and smooth trades.
Here’s how to figure out net asset value (NAV):
NAV = (Total assets – Total liabilities) / Number of outstanding units.
Totaling all assets belonging to this particular Mutual Fund subtracting any outstanding liabilities then dividing it by the number of units held by different investors will enable one to conclude this job well. An investor can determine his/her investment value by checking net asset value (NAV) which tells how much a given investment costs per unit concerning all other units’ costs collectively taken into account.
Another common way of measuring the annual growth rate over time for an investment is its compound annual growth rate (CAGR). It evens out changes, which shows performance more clearly. This means that if your ₹1,000 mutual funds grew at 10% per annum for five years, then on average each year for those five years, the investment would have grown by 10%.