What is the difference between a custodian bank and a mutual fund custodian?

Custodian banks and mutual fund custodians, commonly known as mutual fund corporations, perform very similar roles for different clientele. Mutual fund custodians are responsible for securing and managing the securities held within a mutual fund. Technically speaking, mutual fund custodians fall under the umbrella of custodian banks; however, it is more common to refer to custodians when talking about individual or business investor clients, not mutual fund clients.

Role of a Custodian

In financial markets, a custodian is any business entity that holds its customer's investment assets for protection. Typically, a custodian also offers trade settlements, foreign exchange transactions and tax services. The custody service industry has grown significantly since the 1980s, yet its profit margins continue to shrink. Smaller companies have adapted to new circumstances through technological innovation.

Mutual Fund Custodian

Banks provide custody services to many types of customers, including mutual funds, investment managers, retirement plans, insurance companies, foundations and agency accounts. A custodian that takes care of mutual funds is simply called a mutual fund custodian.

A mutual fund custodian can either be a bank or a trust. The fund's assets, its underlying securities, are kept with the third party to reduce the risk of unscrupulous brokers taking advantage of the fund. The custodian may also keep records for the fund or track other information as needed.

The Investment Company Act of 1940 regulates the custody of mutual fund assets. Under the Act, mutual funds and custodians both need to register with the Securities and Exchange Commission.