Legal Structure of Mutual Funds in India

1The three-tier structure

A mutual fund in India is set up as a trust under the Indian Trusts Act, 1882. There are three tiers:

1. The sponsor creates the fund, like a promoter of a company.
2. The trustees hold the fund's assets in trust for the unitholders and supervise everything.
3. The asset management company (AMC) manages the money day to day.

The sponsor signs a trust deed in favour of the trustees, and the deed is registered under the Registration Act, 1908. The unitholders are the beneficiaries of the trust.

Think of it like this The sponsor builds the house, the trustees are the guardians who hold the keys on behalf of the family (the investors), and the AMC is the professional manager hired to run the household.

Exam trap The mutual fund is the trust; the AMC is a company that manages it. Investors' money belongs to the trust, not to the sponsor or the AMC.

Example XYZ Bank (sponsor) sets up XYZ Mutual Fund as a trust, appoints XYZ Trustee Company to hold it on behalf of investors, and the trustees appoint XYZ Asset Management Ltd to run the schemes.

Remember

• Sponsor → Trust (trustees) → AMC.
• Indian Trusts Act, 1882; trust deed registered under the Registration Act, 1908.

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2The sponsor

The sponsor applies to SEBI to set up the mutual fund and must meet strict conditions to show it is financially sound and experienced. The workbook conditions include carrying on business in financial services for at least 5 years, a positive net worth in each of the preceding 5 years, profits in the immediately preceding years, and an adequate average profit. The sponsor also contributes to the AMC's capital.

Example A large bank that has run a profitable lending business for decades applies to SEBI to sponsor a new mutual fund. Its long record and positive net worth help it qualify.

Remember

• 5 years in financial services, positive net worth in each of the last 5 years, profits.
• The sponsor's liability is limited to its initial contribution.

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3The trustees

The trustees protect unitholders' interests. They check that the AMC follows the rules and the scheme documents, approve key decisions and report to SEBI. At least two-thirds of trustees must be independent (not linked to the sponsor). A trustee cannot be a director or employee of the AMC, or a trustee of another mutual fund.

The trustees sign the investment management agreement with the AMC, which sets out the AMC's responsibilities.

Exam trap The investment management agreement (between trustees and AMC) sets out the AMC's duties. The trust deed (between sponsor and trustees) creates the trust.

Example The AMC wants to launch a new scheme. The SID must be approved by the AMC's board and by the trustees before it is filed with SEBI; the trustees check that it protects unitholders' interests.

Remember

• At least two-thirds of trustees are independent.
• Trustees appoint the custodian and approve the AMC's key decisions.

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4The asset management company

The AMC is the investment manager. It launches schemes, invests the money, calculates NAV, markets the schemes and services investors. At least 50% of its directors must be independent of the sponsor and its associates, and its net worth must be at least ₹50 crore, maintained at all times. An AMC director cannot be a trustee or sit on another AMC's board.

If control of the AMC changes, it needs prior approval of the trustees and SEBI, and unitholders get an exit window of at least 30 days at NAV without exit load. The AMC can be removed by a majority of the trustees or by 75% of the unitholders.

Example A foreign group buys the sponsor's stake in an AMC. Before this happens, SEBI and the trustees must approve, and every unitholder is told and can exit without load within at least 30 days.

Exam trap 51% of unitholders is not enough to terminate an AMC; it takes a majority of trustees or 75% of unitholders.

Remember

• AMC net worth ≥ ₹50 crore; ≥50% independent directors.
• Change of control: trustees + SEBI approval, 30-day exit window.

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5The custodian

The custodian keeps the fund's securities safe, settles purchases and sales, and tracks corporate actions such as dividends, bonuses and rights issues. It is appointed by the trustees and must be registered with SEBI. To keep it independent, a custodian generally should not be associated with the sponsor (the workbook uses a 50% test for this).

Example When a company in the portfolio declares a dividend, the custodian makes sure the money reaches the scheme's account.

Remember

• Custodian: holds securities, settles trades, tracks corporate actions.
• Appointed by trustees; SEBI-registered.

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6Inside the AMC

• Compliance officer: makes sure the AMC follows regulations and reports any breach to the trustees immediately.
• Fund management: research analysts study companies, fund managers decide what to buy and sell, and dealers place the orders.
• Operations: fund accounting (calculating NAV daily), RTA coordination and custody.
• Sales and marketing: builds relationships with distributors and investors.
• Risk management: an independent function with dedicated officers for investment, compliance, operational and cyber risk. It cannot be run by the sales team.

Example An analyst recommends buying a cement company, the fund manager decides to buy 2% of the portfolio, the dealer places the order, and the fund accounting team includes it in that evening's NAV.

Remember

• Analysts → fund managers → dealers.
• Risk management is independent of business and sales.

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7Service providers around the fund

• Registrar and Transfer Agent (RTA): maintains investor records (folios), processes transactions and sends statements. The AMC may appoint a SEBI-registered RTA or do the work itself. Examples: CAMS and KFintech.
• Fund accountant: calculates NAV; no SEBI registration is needed.
• Auditor: the scheme's auditor is appointed by the trustees and must be different from the AMC's auditor.
• Distributors: sell schemes to investors; need NISM certification and an ARN from AMFI.
• Collecting bankers / payment aggregators: collect investors' money.

Exam trap The AMC, not the trustees, decides whether to appoint an RTA. RTAs keep investor records; they do not hold the scheme's securities (that is the custodian's job).

Example Anita changes her bank account. She sends the request to the RTA (for example CAMS), which updates her folio. The custodian, which holds the scheme's shares, is not involved.

Remember

• RTA = investor records; custodian = securities.
• Scheme auditor ≠ AMC auditor.

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8KRAs, rating and valuation agencies, depositories

• KYC Registration Agencies (KRAs): store KYC records centrally, so KYC done once with any SEBI-registered intermediary works everywhere.
• Valuation agencies (such as CRISIL and ICRA) provide prices for debt securities.
• Credit rating agencies rate debt instruments. FMPs must invest only within the rating profile they announced, or in higher-rated paper.
• Depositories (NSDL and CDSL) hold units in demat form through depository participants. ETF units must be held in demat.

Example Kavita completed KYC when opening a demat account. When she invests in a mutual fund later, the fund fetches her KYC from the KRA, so she does not repeat it.

Remember

• KYC once, used everywhere through KRAs.
• ETFs must be held in demat.

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9Exchange platforms, MF Utilities and EOPs

• BSE StAR MF and NSE NMF-II: stock exchange platforms where distributors and brokers can place orders for open-ended scheme units.
• MF Utilities (MFU): an industry platform for transacting in schemes of many fund houses from one place, using a single Common Account Number (CAN).
• Execution Only Platforms (EOPs): digital platforms that let investors buy direct plans.

Example A distributor places a client's SIP order on BSE StAR MF. The exchange passes the order to the AMC, but the AMC and its RTA still handle allotment and payment.

Remember

• Exchange platforms route orders; MFU gives one CAN across fund houses.

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10AMFI

The Association of Mutual Funds in India (AMFI) is the industry body of SEBI-registered AMCs. It registers distributors and issues the ARN, sets codes of conduct and runs investor awareness programmes. It is not a regulator and not a self-regulatory organisation; SEBI is the regulator.

Exam trap AMFI is an industry association. It does not regulate mutual funds or manage investors' money.

Example A complaint against a distributor's conduct can be taken up by AMFI under its code, but a complaint that a scheme broke SEBI rules goes to SEBI, the regulator.

Remember

• AMFI: association of AMCs; issues ARNs; not a regulator or SRO.

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