Mutual funds are gaining importance and have become a preferred investment option among investors. There is convenience and ease of investing and tracking the mutual fund investments. A mutual fund organisation aims to trade in stocks, bonds and other securities to maximise returns for its investors. Also, the MF organisation consists of directors, advisors, fund managers, market analysts, researchers and custodians. As an investor, you must understand the roles of each entity associated with a mutual fund organisation. In this article, we will cover the custodian in mutual fund and their roles, responsibilities and importance.
What is a Mutual Fund Custodian?
The custodian in mutual fund can be a bank, financial institution or trust company that is responsible for safeguarding and managing the securities that the mutual fund holds. While the fund manager takes decisions, he/she does not hold the securities under the fund. The custodian is responsible for holding the securities. Also, it provides a wide range of services that includes fund administration, fund accounting, legal, compliance, transfer agent services and tax support.
The custodian in mutual fund is a third-party entity that works with a mutual fund. Because mutual funds are a large pool of funds by different investors, it requires an additional entity to safeguard the securities.
As per the federal mandate, it became necessary to create a custodian in mutual fund. This will help to maintain segregation between fund assets, fund manager and investment advisor. Also, this ensures safety, transparency or any misuse of authority and access. Therefore, the role of a custodian in mutual fund is to safeguard the investors’ interest who have their contribution to the fund. Moreover, with these regulations in place, it helps to mitigate the risks of fraudulent or dishonest activities by investment companies or fund managers.
What are the Roles and Responsibilities of a Custodian in Mutual Fund?
The following are the roles and responsibilities of a custodian in mutual fund –
- The primary responsibility of a custodian is to safeguard and protect the securities and other assets under a mutual fund.
- It is responsible for keeping records of all detailed transactions of all mutual fund assets.
- Under the regulation, the custodian ensures accurate and updated information for each unit holder. This individual data is provided to the fund house.
- Additionally, the custodian is responsible for all sales and purchases of assets, reconciliation of money and confirmation of shares/units transferred to the right investor.
- The Securities Exchange Commission (SEC) is the superior regulatory authority relating to the mutual fund and trading market. As per their compliance mandate, the custodian has to make periodical reports and communication in a particular format.
- As per the SEC guidelines, the custodian also monitors the reports, performance and activities of different companies in which the mutual fund invests its assets.
- Lastly, the custodian manages the payment of fund expenses related to the purchase and sale of units/shares like transaction fees and conducts the redemption process. Also, they collect and disburse interest and dividends to the unit holders.
Mutual Fund Custodian Services
- The custodian of mutual funds is non-profit organisations. Apart from their roles and responsibilities, there are other services that they offer. These services include fund house bookkeeping, accounting, regulatory, contractual and legal compliance, tax services, etc.
- Even though the primary function of mutual funds is administration, operation and accounting. The remaining back office functions are outsourced to custodians to streamline the fund house operations and achieve cost efficiency.
Why is a Custodian Important in Mutual Funds?
The custodian plays a significant role in mutual funds. It ensures that there is no misuse of power and authority by any entity within the mutual fund organisation. For instance, a director or a fund manager possesses the authority where they can access the investor’s fund. Also, the fund manager directly handles all the investments and conducts the trading activities. While the custodian ensures detailed record keeping and regulating the flow of money for all these transactions. Therefore, with the bifurcation of roles between the fund manager and the custodian, it helps to maintain financial discipline and misconduct/dishonesty can be averted.