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Sources of Income for Mutual Funds

By Eric Rosenberg, eHow Contributor

updated: January 23, 2010
1. Mutual funds are funds managed by investment professionals on behalf of in
vestors. Investors pool their money in the fund in order for the fund managers t
o invest the funds in bulk, often resulting in a higher rate of return than indi
vidual investors can earn on their own.
Mutual funds earn money from several sources, and it is important to under
stand how your fund managers earn income to ensure that the fund's interest alig
ns with yours.
Management fees
2. Mutual funds charge you a fee for your invested balance. These fees range
from under one percent to well over two percent. This is the main income source
for mutual fund management companies.
12b-1 Fees
3. Some mutual funds charge investors a 12b-1 fee, also called a marketing fe
e. These fees are generally used for promotional materials to attract new invest
ors to the fund. Depending on how large these fees are, they do diminish your re
Load Fees
4. Many mutual funds charge a fee when you buy or sell shares. These are call
load fees or purchase and redemption fees. These fees are taken from your initi
al investment or are taken from your cash redemption when you sell shares. They
can be a significant cost for large purchases or sales.

Read more: Sources of Income for Mutual Funds |


A mutual fund is organized as a regular corporation or a trust, depending upon w

hich method the founders prefer. If the fund agrees to pay out all of its divide
nd, interest, and capital gains profits to shareholders, the IRS won't make it p
ay corporate taxes (this is called "pass-through taxation" and helps you avoid t
he double layer of taxation that is ordinarily present when buying shares of sto
The mutual fund itself consists of only a few things:
* A Board of Directors or Board of Trustees: If the company is a corporation
, the people who watch over it for the shareholders are known as directors and s
erve on a Board of Directors. If it is a trust, they are known as trustees and s
erve on a Board of Trustees. For all intents and purposes, there is no differenc
e between the two roles. According to rules set by law, at least 75% of the dire
ctors must be disinterested, meaning they have no relationship to the person or
firm that will actually manage the money. The directors will be paid for their s
ervice. At major, multi-billion dollar mutual funds, they may receive as much as
$250,000 a year!
* The cash, stocks, and bonds the fund holds: The actual stocks, bonds, cash
, and other assets the mutual fund holds.
* Contracts: The fund itself has no employees, just contracts with other fir
ms. These contracts will include custody (that is a bank that will hold all of t
he cash, bonds, stocks, or assets the fund owns in exchange for a fee), transfer
agent (the people who keep track of your purchases and sales of the mutual fund
shares, make sure you get your dividend checks and send you your account statem
ents, audit and accounting, which will be the firm that will come in and verify
the money is present and the mutual fund is worth what it says in the newspaper
everyday when the value is determined, and the investment management, or investm
ent adviser, company. This is the company that actually manages the money and ma
kes buy, sell, or hold decisions. The investment management company is paid a pe
rcentage of the assets, say 1.5%, in exchange for this service. They can be fire
d by the mutual fund's board of directors with very little notice and replaced.
How the Mutual Fund Process Works
Let's say you have $10,000 you want to invest in XYZ Fund. You download a new ac
count application from the mutual fund's website, fill it out, and mail it in al
ong with a check. A few days later, your account is open.
Here's a simplified explanation of what will happen:
1. Your check was mailed to the transfer agent. It was deposited into a bank
or custody account. They will make sure you are issued shares of the mutual fund
based on the value of the fund when your check was deposited.
2. The cash will show up in the account, and will be visible to the portfolio
manager that represents the adviser company. They will get a report telling the
m how much money is available to invest in additional stocks, bonds, or other se
curities based on the net money coming into or out of the fund.
3. When the portfolio manager is ready to buy shares of a stock such as Coca-
Cola, he will tell his trading department to make sure the order gets filled. Th
ey will work with stock brokers, investment banks, clearing networks, and other
sources of liquidity to find the stock and get their hands on it at the lowest p
ossible price.
4. When the trade is agreed upon, a few days will pass until the settlement d
ate. On this date, the mutual fund will have the money taken out of its bank acc
ount and give it to the person or institution that sold the shares of Coke to th
em in exchange for the Coke stock certificates, making them the new owner. These
shares are stored either physically or electronically with the custodian.
5. When Coca-Cola pays a dividend, it will send the money to the custodian, w
ho will make sure it is credited to the mutual fund's account.
6. The mutual fund will likely hold the money in cash so it can pay them out
to you as a dividend at the end of the year.
How Is the Mutual Fund Portfolio Manager Paid?
You may wonder how the mutual fund manager is paid for picking stocks since he o
r she doesn't actually work for the fund but has a contract to manage the money.
If they are paid a fee of 1.5% per year, they would get 1/365th of 1.5% each da
y, based on the weighted average assets of the fund. The money is taken from the
mutual fund's cash account and deposited into the adviser's account each day.

Intermediaries play a pivotal and valuable role in promoting sale of Mutual Fund
s. It is therefore vital that those engaged in selling Mutual Funds have the hig
hest standards of knowledge attitude and ethics. Their well being, quality orien
tation and ways of doing business will have a significant impact on how the Mutu
al Fund Industry develops in the future.
AMFI introduced the process to register the intermediaries who have passed the c
ertification test as AMFI Registered Mutual Fund Advisors (ARMFA), thus laying t
he foundation for an organized industry and allotting a unique code-AMFI Registr
ation Number (ARN) alongwith an identity card. SEBI recognizing the importance o
f this initiative taken by AMFI had made Registration with AMFI after passing AM
FI Certification Test compulsory for intermediaries.
SEBI has clarified that after obtaining certification as per changed mandate, th
e requirement of registration with AMFI in terms of its circular dated November
28, 2002 would continue.
As such, all AMFI/ NISM Certified Intermediaries engaged in marketing and sellin
g of Mutual Fund schemes are required to be registered with AMFI after passing A
MFI/ NISM Certification Test. The Mutual Funds will not be able to deal with int
ermediaries who are not registered with AMFI and obtained ARN.
In terms above mentioned notification and SEBI circular, employees of Corporate
(non-individual) ARN holders who are engaged in marketing of Mutual Funds Produc
ts, are also required to pass test and register with AMFI.
AMFI Registration Number (ARN) : SALIENT FEATURES
The AMFI Registration Number (ARN) has been introduced as the unique code, which
identifies the intermediary as ARMFA.
* ARN is a unique number allotted to:
1. Individual agents, brokers, and other intermediaries engaged in sell
ing Mutual Funds, having passed the AMFI/NISM Certification Test and agreeing to
abide by the code of conduct.
2. Corporates engaged in the business of selling Mutual Funds, which ap
ply to AMFI and agree to abide by the code of conduct.
* A photo identity card indicating the validity period of ARN, would be issu
ed to persons applying for allotment of ARN, after passing the AMFI/ NISM test.
1. Individual intermediaries would have a card with their unique ARN an
d his/ her name and photo.
2. Employees of corporates would have a card with the ARN of their empl
oyer and his/ her name and photo.
* Corporates would be issued Certificate of Registration indicating validity
period of ARN. The application for registration of corporate bodies should comp
ulsorily be accompanied by the application for registration of corporate employe
* Passing certificate issued by National Institute of Securities Market (NIS
M) in respect of 'NISM - Series V-A : Mutual Fund Distribution Examination' has
validity period of three years. Accordingly, ARN issued against such certificate
s as well as renewed ARN on or after June 1, 2010 shall have validity period of
three years. In case of corporate entities validity period for Certificate of Re
gistration issued is 3 years.
* No distributor shall hold more than one ARN card/ Certificate of Registrat
* After obtaining ARN, the intermediaries should approach the AMCs for empan
elment and they can canvass Mutual Fund business of the respective AMCs only aft
er empanelling with them.
* Registered intermediaries can be de-registered as the ultimate censure, fo
r the following reasons:
1. Violation of the code of conduct.
2. Being indicted for serious offences by a regulatory authority.
3. Complaints of gross negligence upheld by a consumer court.
AMFI Guidelines & Norms for Intermediaries ("AGNI")
In order to promote best practices and ethical standards in the business of sale
of Mutual Fund schemes, AMFI has formulated broad guidelines and norms includin
g a code of conduct for the intermediaries, which will be applicable to ARMFA.
AMFI believes that a sincere endeavor to adhere to the guidelines and the code w
ould help promote best and healthy practices in the area of sales and marketing
which would ultimately benefit all concerned - the investor, the intermediary an
d the industry as a whole.
AMFI has authorized M/s Computer Age Management Services Pvt. Ltd. (CAMS) to act
as processing agent on its behalf for the purpose of ARN.
For registering with AMFI, Intermediaries are required to apply in the prescribe
d form. The form can be obtained from the office of AMFI or any office of CAMS.
Alternatively the form can also be downloaded from AMFI's website www.amfiindia.
Application forms must be submitted in person alongwith KYD application form to
the office of CAMS (CAMS-POS). The details of fees and documents required to be
submitted in respect of various categories of intermediaries is indicated in the
below mentioned table :-
Entity Required Documents Additional requirement ARN Registration Fees
Banks/ NBFC/ Institutional Distributors Copy of Board Resolution & List
of Authorized signatories AMFI/ NISM Certified & AMFI Registered Corporate
Employee. 500,000
Public Ltd. Co. Memorandum and Articles of Association & List of Authori
zed signatories AMFI/ NISM Certified & AMFI Registered Corporate Employe
e. 500,000
Pvt. Ltd. Co. Memorandum and Articles of Association & List of Authorized sign
atories AMFI/ NISM Certified & AMFI Registered Corporate Employee.
Partnership Firm Partnership Deed & List of Authorized signatories
AMFI/ NISM Certified & AMFI Registered Corporate Employee. 25,000
Societies and Trusts/ HUFs Society by-laws, certificate issued by Registrar
of Societies & list of Authorized signatories/ Trust deed & List of trustees/ H
UF deed and Name of Karta & Authorized person AMFI/ NISM Certified & AMFI Regi
stered Corporate Employee. 25,000
Post Offices List of Authorized signatories AMFI/ NISM Certified & AMFI Regi
stered Corporate Employee. 15,000
Proprietorship Firms Self Certification letter from the proprietor as per for
mat given below the table. AMFI/ NISM Certified & AMFI Registered Corporate
Employee. 10,000
Corporate Employees In case of Online Test - Copy of Scorecard with photo/ C
In case of Manual Test - Copy of Certificate. Two stamp size photographs
Senior Citizens Criteria to apply for allotment of ARN under this category :
1. A person who has attained age of 50 years as on May 31, 2010 OR
2. A person who has at least 10 years experience in the securities market as
on May 31, 2010 AND/ OR
3. A person who has at least 10 years experience in distribution of Mutual Fu
nd Products as on May 31, 2010
Any individual satisfying any of the above mentioned criteria is eligible to reg
ister himself as ARN holder under senior citizen category.
1. Proof of age
2. Proof of having attended CPE/ Refresher Course
3. Certificate from a member AMC (Mutual Fund) certifying that he/she has wor
ked for Ten years as mutual fund distributor/agent as on May 31, 2010. AND/ OR
4. Certificate from a Stock Exchange/ member of Stock Exchange, certifying th
at he/she has experience of Ten years in the securities market as on May 31, 201
Two stamp size photographs 5,000
Foreign Entities other than Individuals In addition to the documents spe
cifically mentioned against the respective category other than Individuals. Lice
nse issued by the local authority to market MF Units. (All documents in local la
nguage to be submitted with English Translation) AMFI/ NISM Certified & A
MFI Registered Corporate Employee. Appropriate fees in accordance with abov
e fees schedule as per the category of foreign entity.

The prescribed fees can be paid only by demand draft in favour of the "Associati
on of Mutual Funds in India" payable at the location of the CAMS office (CAMS-PO
S) to which the form is submitted.

Draft of Self Declaration for Proprietorship firm

"I hereby declare that I, ____________ am the sole proprietor of engaged in sell
ing and marketing of units of Mutual Funds. I hereby undertake that all the pers
ons who are engaged in marketing and selling of Mutual Fund Schemes are AMFI/NIS
M Certified and registered/ shall pass NISM Mutual Fund Distributors Certificati
on Examination and Register with AMFI before canvassing the mutual fund business
. I confirm that my firm will carry on canvassing of business for products of Mu
tual Funds in accordance with Guidelines and Norms for Intermediaries (AGNI) inc
luding Code of Conduct prescribed by SEBI/ AMFI and any rules and Regulations th
at may be framed or amended by SEBI/ AMFI from time to time."
Draft of declaration where Proprietor, Partnership Firm and Karta of HUF as a co
rporate entity apply for registration without passing AMFI/NISM Certification Te
st by themselves / any partner but along with application for registration of th
eir employee who is AMFI/NISM Certified :
The declaration / undertaking as under should be furnished along with applicatio
n :
"I/We hereby declare that I / None of the partner is engaged in the activity of
selling/ marketing of Mutual Fund schemes and all such activities are carried ou
t only by the persons employed who are AMFI/NISM Certified.
I/We further undertake that all our employees who are engaged in sales and marke
ting Mutual Fund schemes shall pass NISM/AMFI Certification Test and obtain regi
stration with AMFI before canvassing business for Mutual Funds.
I/We also hereby undertake to pass AMFI/NISM Certification Test and obtain regis
tration with AMFI as when I/any partner decides to engage in sales and marketing
of Mutual Fund schemes in future."
The documents shall be scrutinized and if found in order and if the prescribed f
ees have been realized, a certificate of recognition or photo identity card as a
pplicable shall be issued. These will be mailed directly to the applicant.
Procedure for issuing duplicate ARN Card/ Certificate of Registration
Fees payable for obtaining duplicate ARN card due to change of name, address, et
c. in case of individuals/senior citizens/corporate employee is Rs. 1000/- and f
or issue of duplicate Certificate of Registration in case corporates is Rs. 5000
Fees payable for issue of Certificate of Registration to Corporates (existing AR
N Holders) due to change in name/ change of status:-
* When there is a change in name without change in status the fees will be 5
0% of what is presently being charged for fresh registration.
* When there is a change of status (e.g. change from Private Limited Company
to Public Limited Company, etc.), fees will be same as for the fresh registrati

What is the Memorandum of Association (MOA) and the Articles of Association (AO
A) of a company and what is the procedure in their regard?

On receipt of the name approval letter from the ROC the MOA and the AOA are requ
ired to be drafted. The MOA states the main, ancillary / subsidiary and other ob
jects of the proposed company. The AOA contains the rules and procedures for the
routine conduct of the proposed company. It also states the authorized share ca
pital of the proposed company and the names of its first / permanent directors.
After the MOA and AOA are required to be stamped.
A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty d
epends on the authorized share capital.

What is the Memorandum of Association (MOA) and the Articles of Association (AO
A) of a company and what is the procedure in their regard?

On receipt of the name approval letter from the ROC the MOA and the AOA are requ
ired to be drafted. The MOA states the main, ancillary / subsidiary and other ob
jects of the proposed company. The AOA contains the rules and procedures for the
routine conduct of the proposed company. It also states the authorized share ca
pital of the proposed company and the names of its first / permanent directors.
After the MOA and AOA are required to be stamped.
A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty d
epends on the authorized share capital.
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What are the documents required to be executed for incorporation?

The following documents are required to be executed (signed) before they are sub
mitted to the ROC:
MOA and AOA - These are required to be executed by the promoters in their
own hand in the presence of a witness in quadruplicate stating their full name,
father's name, residential address, occupation, number of shares subscribed for,
Form No. 1 - This is a declaration to be executed on a non-judicial stamp
paper of INR 20 by one of the directors of the proposed company or other specifi
ed persons such as Attorneys or Advocates, etc. stating that all the requiremen
ts of the incorporation have been complied with.
Form No. 18 - This is a form to be filed by one of the directors of the co
mpany informing the ROC the registered office of the proposed company.
Form No. 29 - This is a consent obtained from all the proposed directors o
f the proposed company to act as directors of the proposed company. (Not require
d in case of private company).
Form No. 32 - This is a form stating the fact of appointment of the propos
ed directors on the board of directors from the date of incorporation of the pro
posed company and is signed by one of the proposed directors.
Name approval letter in original.
Power of Attorney signed by all the subscribers of MOA authorizing one of
the subscribers or any other person to act on their behalf for the purpose of in
corporation and accepting the certificate of incorporation.
Power of Attorney in case of a subscriber who has appointed another person
to sign the MOA on his behalf.9. Filing fees as may be applicable.

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How is the certificate of incorporation issued?
After the documents in FAQ 5 are filed, the ROC calls the attorney on a specifi
c date for scrutiny and making the corrections in the MOA and AOA filed. On comp
lying with the same, the certificate of incorporation is granted to the attorney
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Registrar & Transfer Agent

Mutual fund (MF) houses have to maintain meticulous records of every transaction
made by each of their investors. Registrar and Transfer agents (R&T agents) hel
p them do this
Kundan Kishore
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Keeping Records
Every mutual fund house has a large number of investors and it is essential to m
aintain records of all transactions made by each investor. Registrar and Transfe
r agent (R&T agent) is a body that maintains these records on behalf of the fund
house. There are two main R&T agents in India Computer Age Management Services (C
ams) and Karvy. Few MFs, such as Franklin Templeton MF, have their own in-house
R&T agents.
How An R&T Agent Works
An R&T agent acts as a third-party on behalf of a fund house and has a vital rol
e to play. It has a wide network through which it helps investors with their tra
nsactions, for example, getting the forms of various fund houses, transacting wi
th fund houses or providing account statements. An R&T agent also provides techn
ology-based services like online transaction or account statement facilities. It
acts as single-window system for investors.
An R&T agent also helps investors with information on various corporate actions
like details on new fund offers, dividend distributions or even maturity dates o
f investments. This information is also available with the fund houses, but an R
&T Agent is a one-stop shop for all the information. Investors can get informati
on about his various investments into different schemes of different fund house
at a single place.
An R&T agent helps MF investors in submitting forms. This is very useful, especi
ally for those investors who want to invest in many MFs. As per the Securities a
nd Exchange Board of India s (Sebi) rules, there is a cut-off time by when the inv
estment has to be made for that day. So, if an investor has to make multiple inv
estments, he can use an R&T agent s single window system instead of rushing to dif
ferent fund houses to submit applications.
R&T agents also help MFs reduce costs. Since they are present across the country
, they also double as branches for their affiliated MFs as point-of-sale termina
Application for registration
3. An application for registration of a mutual fund shall be made to the Board i
n Form A by the sponsor.
Application fee to accompany the application
4. Every application for registration under regulation 3 shall be accompanied by
non-refundable application fee as specified in the Second Schedule.
Application to conform to the requirements
5. An application, which is not complete in all respects shall be liable to be r
Provided that, before rejecting any such application, the applicant shall be giv
en an opportunity to complete such formalities within such time as may be specif
ied by the Board.
Furnishing information
6. The Board may require the sponsor to furnish such further information or clar
ification as may be required by it.
Eligibility criteria
7. For the purpose of grant of a certificate of registration, the applicant has
to fulfil the following, namely:-
(a) the sponsor should have a sound track record and general reputation of fairn
ess and integrity in all his business transactions;
Explanation: For the purposes of this clause "sound track record" shall mean the
sponsor should,-
(i) be carrying on business in financial services for a period of not less than
fiveyears; and
2. the networth is positive in all the immediately preceding five years; and
3. the networth in the immediately preceding year is more than the capital co
ntribution of the sponsor in the asset management company; and
(iv)the sponsor has profits after providing for depreciation, interest and tax i
three out of the immediately preceding five years, including the fifth year.
(aa) the applicant is a fit and proper person3
(b) in the case of an existing mutual fund, such fund is in the form of a trust
and the trust deed has been approved by the Board;
(c) the sponsor has contributed or contributes atleast 40% to the networth of th
e asset management company;
Provided that any person who holds 40% or more of the net worth of an asset mana
gement company shall be deemed to be a sponsor and will be required to fulfil th
e eligibility criteria specified in these regulations;
(d) the sponsor or any of its directors or the principal officer to be employed
by the mutual fund should not have been guilty of fraud or has not been convicte
d of an offense involving moral turpitude or has not been found guilty of any ec
onomic offence.
(e) appointment of trustees to act as trustees for the mutual fund in accordance
with the provisions of the regulations;
(f) appointment of asset management company to manage the mutual fund and operat
e the scheme of such funds in accordance with the provisions of these regulation
(g) appointment of a custodian in order to keep custody of the securities and ca
rry out the custodian activities as may be authorised by the trustees.
Consideration of application
8. The Board, may on receipt of all information decide the application.
Grant of Certificate of Registration
9. The Board may register the mutual fund and grant a certificate in Form B on t
applicant paying the registration fee as specified in Second Schedule.
Terms and conditions of registration
10. The registration granted to a mutual fund under regulation 9, shall be subje
ct to the following terms and conditions:-
(a) the trustees, the sponsor, the asset management company and the custodian sh
all comply with the provisions of these regulations;
(b) the mutual fund shall forthwith inform the Board, if any information or part
iculars previously submitted to the Board was misleading or false in any materia
l respect;
(c) the mutual fund shall forthwith inform the Board, of any material change in
the information or particulars previously furnished, which have a bearing on the
registration granted by it;
(d) payment of fees as specified in the regulations and the Second Schedule.
Rejection of application
11. Where the sponsor does not satisfy the eligibility criteria mentioned in reg
ulation 7, the Board may reject the application and inform the applicant of the
Payment of service fee
12. A mutual fund shall pay before the 15th April each year a service fee as spe
cified in the Second Schedule for every financial year from the year following t
he year of registration.
Provided that the Board may, on being satisfied with the reasons for the delay p
ermit the mutual fund to pay the service fee at any time before the expiry of tw
o months from the commencement of the financial year to which such fee relates.