Chapter 2: Fund Structure and Constituents

Learning Objective

In this unit, you will understand the salient features of the legal structure of mutual funds in India and the role of key constituents that make up the overall mutual fund eco-system.

Mutual funds in India are governed by SEBI (Mutual Fund) Regulations, 1996, as amended till date.

The regulations permit mutual funds to invest in securities including money market instruments, or gold or gold related instruments or real estate assets.

Mutual funds are constituted as Trusts. The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund operation.

Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund.

In order to perform the trusteeship role, either individuals may be appointed as trustees or a Trustee company may be appointed.

When individuals are appointed trustees, they are jointly referred to as Board of Trustees. A trustee company functions through its Board of Directors.

Day to day management of the schemes is handled by an AMC.

The AMC is appointed by the sponsor or the Trustees. Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related instruments & real estate assets) is with a Custodian, who is appointed by the Trustees.
Investors invest in various schemes of the mutual fund. The record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).

The sponsor needs to have a minimum 40% share holding in the capital of the AMC.

The sponsor has to appoint at least 4 trustees – atleast two-thirds of them need to be independent. Prior approval of SEBI needs to be taken, before a person is appointed as Trustee.

AMC should have networth of at least Rs10crore. At least 50% of the directors should be independent directors. Prior approval of the trustees is required, before a person is appointed as director on the board of the AMC.

  • Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC.
  • The mutual fund is formed as trust in India, and not as a company.
  • In the US mutual funds are formed as investment companies.
  • Investor’s money is held in the Trust (the mutual fund).

The Sponsor:

  • Sponsor is defined under the SEBI regulations as any person who, acting alone or in combination with another body corporate, establishes a mutual fund.
  • Sponsor is the promoter of the fund.
  • Sponsor could be a bank, a corporate or a financial institution.
  • Sponsors then form Trust and appoint Board of Trustees.
  • The sponsor also appoints Custodian.
  • As per SEBI regulations, sponsor must contribute at least 40% of the net worth of the AMC and possess a sound financial track record over five years prior to registration.
  • Sponsor signs the trust deed with the trustees.
  • Sponsor creates the AMC and the trustee company and appoints the board of directors of companies, with SEBI approval.
  • Sponsor should have at least a 5 year track record in the financial services business and should have made profit in at least 3 out of the 5 years.
  • The AMC’s capital is contributed by the sponsor.
  • Sponsor should contribute at least 40% of the capital of the AMC.

The Trustees:

  • A mutual fund in India is form as Trust under Indian Trust Act, 1882.
  • The trust-mf is managed by Board of Trustees.
  • The board of Directors i.e. Trustees do not manage the portfolio of securities directly rather they appoint as AMC (Asset Management Company)
  • Trustees ensure that fund is managed by stated objective and as per SEBI regulations.
  • Trusts always work for the interest of unit holders.
  • The trust is created through a document called Trust Deed that is executed by sponsor in favors of Trustees.
  • The Trustees being the primary guardians of unit holder’s funds and assets.
  • Trustees must ensure that the investor’s interests are safeguarded and that the AMC operations are as per regulation laid down by SEBI.
  • SEBI mandates a minimum of 2/3rd independent directors on the board of the trustee company.
  • Trustees are appointed by the sponsor with SEBI approval.
  • Trustees are required to meet at least 4 times a yea to review the AMC.
  • The trustees make sure that the funds are managed according to the investor’s mandate.

Rights of Trustees:

  • The trustee appoints AMC with prior approval of SEBI.
  • They also approve each new scheme floated by AMC.
  • They have the right to request any necessary information from the AMC concerning the operations of various schemes.
  • The trustees may take any necessary action against AMC if they found AMC operations are not as per the SEBI regulations.
  • Manages the mutual fund and look after the operations of the appointed AMC.
  • Trustees approve each MF scheme floated by AMC
  • Trustees receive fee for their services.
  • The investments are held by the Trustee
  • Trustees can seek remedial actions from AMC
  • Trustees can dismiss the AMC
  • The trustees have the right to ensure that, based on their quarterly review of AMC’s net worth; any shortfall in the net worth is made by the AMC.

Obligations of Trustees:

  • To ensure that funds transactions as per SEBI regulations
  • To ensure that the proper key person of AMC has been appointed. And also operations of other staffs of AMC.
  • To ensure that the due diligence (care) has been given for empanelment of brokers.
  • Trustees Manages the Mutual Fund and look after the operations of the appointed AMC
  • The investments are held by the Trustee
  • At least 4 members should be there in Board of Trustees.
  • 2/3 members in the Board of Trustees should be independent.
  • Sponsors execute and register Trust Deed in favors of Trustees.
  • Trustee of one MF can not be a trustee of another MF, unless he/she is an independent trustee in both the cases.
  • The appointment of all trustees has to be done with prior approval of SEBI.
  • Trusts are formed through “Trust Deed”
  • Trust ensures that AMC has not given any undue advantage to any associates.
  • Trustee ensures that AMC is managing the fund as per SEBI regulations
  • Meeting of Trustees should held once in every two months.
  • SEBI categorizes the Obligations of Trustees as
    • General Due Diligence &
    • Specific Due Diligence
      1. General Due Diligence
        • Appointment of AMC & its directors
        • Observance of AMC functioning and desirability of its continuance
        • Protection of Trust property
        • Ensuring that all constituents and associations are registered entities
        • Review of service contracts and terms
        • Reporting to SEBI any special developments in the mutual fund
      1. Specific Due Diligence
        • Trust must appoint independent auditor and obtain from them periodic internal audit reports from AMC
        • Obtain compliance test reports from the AMC once every two months.
        • These reports are to be discussing in meeting of trustees.
        • Trustees set a code of ethics for trustees and for AMC personnel

AMC-Appointments and Functions

  • The role of AMC is to act as investment manager of trust
  • The AMC (as appointed by trust/sponsor) require approving by a SEBI
  • The AMC supervision under its own board of directors and also the directors of trustees and SEBI
  • The trustees are empowered to terminate the appointment of AMC and appoint a new AMC with prior approval of SEBI and unit holders.
  • The AMC is the name of the Trust; manage different investment schemes as per investment management agreement with the trustees.
  • The AMC of a MF must have a net worth of at least Rs.10 Crores at all times.
  • Director of AMC should have complete finance professional experience.
  • The AMC can not act as a trustee of any other MF.
  • The AMC always act in the interest of unit holders (investor)
  • The AMC gets a fee for managing the funds, according to the mandate of the investors
  • At least ½ of the AMC’s Board should be of independent members
  • An AMC can not engage in any business other than portfolio advisory and management
  • An AMC of one fund cannot be Trustee of another fund
  • AMC should be registered with SEBI
  • AMC signs an investment management agreement with the trustees

Obligation of AMC & its directors

  • Investment of the fund according to the SEBI regulation & trust deed.
  • They are answerable to the trustees and must submit quarterly reports to them on AMC activities and compliance with SEBI regulations
  • Each day NAV is updated on AMFI website by 9 pm
  • In the event of merger or consolidation of schemes, the unit holders are intimated through a letter giving them option to exit at prevailing NAV without exit load.

Custodians & Depositories

  • For safekeeping of physical securities of MF custodian is appointed by board of trustees.
  • The custodian should be registered with SEBI. Dematerialized forms of securities are held in the custody of Depositories Participant.
  • The investor’s fund and the investments are held by the custodian, who is the guardian of the funds and assets of the investors.
  • Sponsor and the Custodian cannot be the same entity

Function of Custodian

  • Responsible for the securities held in the mutual funds portfolio
  • Keep an investment record of the mutual fund
  • Collect dividends and investment payments due on the mutual funds investment
  • Track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition.

Registrars & Transfer Agents

  • They are responsible for issuing and redeeming units of the MF and providing other MF related services to investors
  • Register and Transfer (R&T) Agents manage the sale and repurchase of units and keep the unit holders accounts.

Functions of Registrars

  • Process investors application
  • Record details of investors
  • Send information to investor
  • Process dividend payout
  • Incorporate changes in investor information
  • Keeping investor information up to date


  • AMC appoints a distributor (also called MF advisor, agent, broker, intermediaries etc) who sells units MF to investors on the behalf of fund house.
  • A sponsor or an associate may act as distributors of AMC. For example, Bank which is sponsor of Mutual Fund Company may act as distributor also for selling its mutual funds products
  • AMC has the right whether to impaneled (appoint) or not distributor for selling his MF scheme.
  • They also have the right of commission structure which they offer to distributor
  • You may find different commission structure for different AMC scheme.
  • A distributor can act for several or all MF
  • For all employees and distributors of MF, AMFI certification test has been made mandatory by SEBI
  • All distributors are required to be registered with AMFI and obtain AMFI Registration Number (ARN)
  • The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trial commission which is paid depending on the time the investors stay with the fund.

Fund Mergers & Takeovers

A running fund constitution can change in the following possible ways

  1. Trustees may decide to change the AMC and handover the scheme to a new AMC
  2. The scheme may be merged with another scheme of the same AMC
  3. The AMC is taken over by another set of sponsors
  4. One AMC may merge with another AMC
  5. Just the schemes may be taken over by another set of trustees

Transaction Type





High Court


AMC Takeover by new sponsor




AMC Merger




Trustees changing AMC




Schemes taken over by another AMC




Scheme Merger




Example of AMC Merger - HB & Taurus – Two MF companies in India which merged using the AMC merger route

Example of AMC Takeover - Zurich acquired Threadneedle globally and bought out ITC Threadneedle’s India business. Zurich similarly acquired Kemper Twentieth Century Finance. In recent times Alliance was taken over by Birla.

Example of Scheme Takeover – Zurich finally exited MF business in India and sold all its schemes in India to HDFC (technically the AMC was not sold but just the schemes)


  1. How to select a Mutual Fund? and Pls give some information on mutual fund, which mutual fund is good to invest?

  2. This shows writer's commendable knowledge on the subject

  3. This is nice. I learned something new here. Something not mentioned in schools that is.


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