Legal Structure of Mutual Funds in India
The four-tier structure
A mutual fund in India is set up as a trust and operates through four parties, each with a defined role.
1. Sponsor - the promoter. It establishes the trust, appoints the trustees, contributes at least 40% of the AMC's net worth, and must have a sound track record, financial soundness and a minimum net worth of ₹5 crore, with profits in at least three of the last five years.
2. Trustees - hold the assets of the fund in trust for unitholders. They must be a separate entity from the AMC, with at least two-thirds of the trustees being independent directors, and not more than one-third associated with the sponsor. Trustees appoint the AMC, approve schemes, review performance and expenses, and are the first-line regulator for unitholders.
3. Asset Management Company (AMC) - the investment manager. Appointed by the trustees with SEBI approval, it runs the portfolio, markets schemes and earns a management fee. It must maintain minimum net worth (₹50 crore) and its directors need SEBI approval.
4. Other service providers - custodian (safe custody of securities), registrar and transfer agent (folies, NAV, records), auditor, and distributors.
Regulatory architecture
SEBI (Mutual Funds) Regulations, 1996 govern the trust deed, investment limits, valuation, disclosures (half-yearly portfolio, annual report), and unitholders' rights.
Traps
- The AMC is not the trustee; the AMC cannot hold the fund's assets.
- The sponsor does not manage the money - it only establishes and seeds the fund.
- Trustees must be independent of the sponsor, not the other way round.
- The mutual fund itself is a trust, not a company; the AMC is the company.
Rule of thumb
Trustees = guardians; AMC = manager; custodian = vault; RTA = record-keeper.