Mutual Fund Custodial Bank
Mutual funds are investments in which a group of investors pool their funds for the purchase of a diverse number of securities. Mutual funds are managed by professional money managers. A custodial bank serves as an objective, independent third party between the mutual fund company, shareholders and the securities they invest in.
The custodial bank is responsible for providing safekeeping, recordkeeping, assistance with dividend and capital gain distributions, and assistance with investor distribution requests. Because of this role, the custodial bank must be closely knit with the mutual fund, as it needs to understand how the fund works and what trading strategies need to be implemented.
A custodial bank has several distinct roles in relation to a mutual fund. These are:
• Holding of Securities: The custodial bank secures legal title to the securities owned by the mutual fund. It is responsible for ensuring that the funds are held in a safe and secure manner. The custodial bank also provides valuation of these securities providing an up-to-date account of how each fund is performing.
• Accounting of Transactions: The custodial bank provides complete and accurate records of all trust transactions, keeping track of all parties involved in the funds, such as shareholders, brokers and the mutual fund company itself.
• Settlement of Transactions: The custodian is responsible for the settlement of transactions, ensuring that the mutual fund receives the correct amounts of cash and securities according to the trade date on which the securities are purchased or sold.
• Protection of Assets: The custodial bank provides measure of protection to the mutual fund by reducing the risks associated with fraud and wrongful use of assets. It also protects the assets of the mutual fund against theft or loss.
• Dividend and Capital Gain processing: The custodian bank ensures that the mutual fund receives the dividends and capital gains from their investments. It also provides shareholders with accurate and timely payment of dividends or capital gains from the fund.
For mutual funds to perform effectively, it is important that the custodial bank performs its role efficiently. The custodian should be registered in the jurisdictions where the mutual fund is active and must comply with anti-money laundering laws. The custodial bank should also be insured and understand the mutual fund business. This is due to the fact that the custodian is handling large amounts of assets and the fund is entirely dependent on the performance of the custodial bank.
A good custodial bank will have strong staff with expertise in the mutual fund universe and specialized teams that keep abreast of developments in the financial markets. By relying on a reputable custodial bank, mutual fund companies can effectively manage their operations while protecting the interests of their shareholders.
