Thursday, January 23, 2014

What do Custodians do?

A custodian is responsible for the safekeeping and safeguarding of investments & securities on behalf of the owners. Owners could be mutual funds, HNIs, etc.

Securities which are in paper form are kept in safe custody of a custodian and securities which are in dematerialized electronic form are kept with a Depository Participant, who acts on the advice of custodian.

The 1940 Investment Company Act mandates that the fund investment adviser and fund assets be kept separate, which necessitates the role of the third-party custodian. It's important to note that the custodian provides safekeeping of securities but has no role in portfolio management.

Custodians perform important back office operations such as settlement of trades, accounting, collect dividends and interest, etc. This ensures that an accurate record of all trades and cash flows in maintained by the custodian and this helps in preventing any fraud.