A mutual fund custodian is a financial institution that acts as a third party for a mutual fund, holding the assets owned by the fund. Mutual fund custodians can have a number of duties in addition to safeguarding assets, such as acting as transfer agents for the funds they serve. The use of a third party to hold securities is deemed important for security and safety and is designed to limit the possibilities of fraud and questionable financial activities on the part of the fund managers.
Also known as a mutual fund corporation, a mutual fund custodian can be a bank or any other type of financial institution, as long as it agrees to comply with financial regulations. Many nations have a regulatory framework defining mutual funds and outlining basic business practices that need to be followed. Failure to comply with these regulations can result in penalties for the mutual fund, including fines, especially if clients of the fund experience financial damages.
The mutual fund custodian keeps the assets associated with the fund along with the records pertaining to the assets. This information is available for inspection in the interests in transparency and custodians are required to keep mutual fund assets separate from other types of assets they may handle, including assets being held on behalf of members of a mutual fund's board or management team. In the event that assets are transferred, the custodian can work with the transfer agent or act as the transfer agent to conduct the deal.
By keeping physical assets in the case of a mutual fund custodian and leaving management to a separate mutual fund manager, financial regulators aim to limit the chances of fraud. Fund managers cannot do things like transferring assets away without consent and the people handling assets cannot purchase assets without prior agreement. Furthermore, if the management of the fund dissolves, the assets are still safe and kept secure by the mutual fund custodian for the members of the fund. These two separate entities act as checks and balances on each other for the safety of investors.
When people invest in mutual funds they should be provided with information about how and where their investments are applied, who is in charge of safekeeping assets, and who is responsible for managing the fund. It is advisable to keep all disclosures relating to mutual funds and other investments in a safe place, in the event of a problem. Since mutual fund clients buy shares in a fund, not actual securities, it is also critical to keep records of the amount of money invested in the fund and to check these records against disclosure statements to confirm that they are accurate.