Can Charitable Trusts Invest in Mutual Funds and Stocks?
Introduction
With the rise in popularity of mutual fund investments and direct stock trading in India, many investors are seeking better returns to meet their financial goals. However, there is still a lack of awareness among large non-profit organizations about the potential benefits of these financial instruments. This article explores the possibility of trusts, Section 8 companies, and societies investing in market-linked instruments.
Understanding the Legal Framework
Public Trusts
Public trusts in India are governed by different legislations in each state. While states like Bihar, Maharashtra, Madhya Pradesh, and Orissa have their own laws, other states allow public trusts to invest in any securities as long as their trust deeds do not prohibit it. The Indian Trusts Act of 1882 also applies to both public and private trusts.
Section 8 Companies and Societies
Section 8 companies are non-profit organizations that aim to promote charitable activities. They can invest in mutual funds and listed securities, but the investments should align with the non-profit objectives of the company. Societies registered under the Societies Registration Act of 1860 can also invest in mutual funds and listed companies.
Exploring the Specifics
Maharashtra Public Trusts Act
The Maharashtra Public Trusts Act, the oldest legislation governing state public trusts, allows investments in various prescribed securities, including Post Office Savings Bank, government savings certificates, small savings schemes, and deposits with cooperative and scheduled banks. It also permits investments in debentures, public sector companies, bonds issued by public companies for housing construction, and immovable property.
Mutual Funds and Public Trusts
While the Income Tax Act allows charitable entities to invest in mutual funds, the Maharashtra Public Trusts Act only permits select mutual funds (about 60 schemes) that are approved by the charity commissioner. The list of approved funds is not publicly available, and trustees need to consult with asset management companies that hold a letter from the charity commissioner.
Indian Trusts Act
The Indian Trusts Act of 1882 provides more comprehensive guidelines for private trusts. It allows investments in government securities, debt mutual funds, minimum AA-rated debt securities by corporations, infrastructure debt instruments, listed companies with a market cap of at least ₹5,000 crore, and equity-focused mutual funds and ETFs.
Common Practices and Considerations
Trusts’ Risk-Averse Approach
Despite the available investment options, most trusts tend to invest only in fixed deposits due to a risk-averse approach. This conservative investment strategy may be influenced by the lack of explicit mention of equity investments in the trust documents. However, trustees have a legal duty to act in the best interests of the beneficiaries and should explore more efficient avenues.
Realizing Better Returns
Financial advisors have successfully encouraged charitable institutions to diversify their investment portfolios. For example, investments in government securities can help manage interest rate risk and provide opportunities for capital appreciation. By investing in state-approved debt mutual funds, trusts can avoid treating interest accrued on fixed deposits as income, giving them more flexibility in their spending.
Exploring New Investment Avenues
Charitable trusts have opportunities to explore newer investment avenues beyond fixed deposits. However, the laws governing charitable trusts are broad and lack specific regulations like retirement trusts. A regulatory push could ensure better deployment of funds by charitable entities and encourage them to embrace additional investment options.
Conclusion
While there is no central act governing public trusts, different state legislations and acts like the Indian Trusts Act, 1882, provide guidelines for investments. Mutual funds and stocks are viable investment options for trusts, Section 8 companies, and registered societies, with some restrictions and approvals. It is crucial for charitable organizations to diversify their investment portfolios and seek advice from financial professionals to ensure they meet their financial goals effectively.
This article was written with insights from Pritika Kumar, co-founder of No Grey, a Gurgaon-based online legal platform, and other industry experts.
Key Takeaways
- Public trusts in India are governed by state legislations, while private trusts are regulated by the Indian Trusts Act, 1882.
- Section 8 companies and societies can invest in mutual funds and listed securities, aligned with their non-profit objectives.
- The Maharashtra Public Trusts Act permits investments in various prescribed securities, but the list of approved mutual funds is limited.
- The Indian Trusts Act offers more investment avenues for private trusts, including government securities, debt mutual funds, and listed companies.
- Most trusts prefer fixed deposits due to a risk-averse approach, but diversifying investments can provide better returns.
- Charitable trusts should consider exploring newer investment avenues beyond fixed deposits and seek advice from financial professionals to optimize their funds.
Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice.
