A mutual fund is a professionally managed pool of investments, usually stocks and bonds. But the mutual fund organization isn't a single company; it's several organizations operating independently under the authority and supervision of the fund's board of directors, acting on behalf of its shareholders. Two critical organizations within this structure are the investment manager and the custodian.
Fund Management and Oversight
A mutual fund is organized around its board of directors, which oversees management and oversight functions on behalf of the fund's investors. Fund management includes the fund's administrator, transfer agent, principal underwriter and investment manager. Fund oversight is conducted primary by the fund's independent public accountant and custodian. By design, these two functions overlap somewhat: All management functions include a degree of oversight, and the custodian's function includes both. The redundancy helps to ensure the safety of investors' funds.
Investment Manager's Role
The investment manager -- sometimes called the investment adviser -- heads a team of professional investors. Guided by the manager, the investment team buys and sells individual stocks to obtain the best result for the fund's investors. "Best result" in this case does not always mean the highest profits but rather the best results obtainable within the fund's investment profile. Management of a mid-cap value fund, for instance, seeks to buy midsized stocks that may be undervalued by other investors. A small-cap growth fund's management seeks to buy companies with market capitalizations between $200 million and $2 billion that have recently outperformed the market.
The Custodian's Role
A mutual fund's custodian is most often a major bank. Its primary oversight responsibility is the protection of the investors' assets. It settles accounts, ensuring that investors' purchases and sales are tracked, that money is deposited in the fund's custodial account and that money or shares are forwarded to the investor or her representative, usually a brokerage. The custodian keeps records of these transactions in compliance with Securities and Exchange Commission regulations and makes the periodically required reports to the SEC. The custodian also pays fund expenses related to the purchase or sale of shares, such as transaction fees. The custodian also monitors the activities of companies in which the fund invests to ensure SEC compliance.
Essential Differences in Roles
The fund's managers invest shareholders' assets. The custodian oversees the flow of money and shares in and out of the fund. The manager's role is primarily entrepreneurial, and the custodian's role is primarily regulatory. Because the two functions are in two completely separate organizations, if the fund's management should fail and declare bankruptcy, the fund's custodian, having complete and exclusive control over fund assets, can still return investments to shareholders.