Unit 2 · 4% of the paper
Fund Structure & Constituents
The three-tier structure — sponsor, trustees, AMC — and the service providers around it. Only four per cent of the paper, but it is the unit that makes every later one make sense.
In short
- Three tiers: the sponsor sets the fund up, the trustees hold assets for unit holders, the AMC manages the money.
- The trustees supervise the AMC. That direction of accountability is the point of the structure.
- The custodian holds the securities; the AMC never has custody of them.
- The registrar and transfer agent handles unit holder records — applications, redemptions, statements.
- A distributor is not part of the structure. It is a channel appointed to sell.
A mutual fund in India is not one organisation. It is a structure of three separate parties with separate jobs, deliberately kept apart so that nobody both holds the money and decides what to do with it. Understanding who is answerable to whom makes most of the regulatory material later in this syllabus obvious rather than arbitrary.
What are the three tiers of a mutual fund?
The sponsor is the promoter. It establishes the fund, contributes to the asset management company's capital and applies to SEBI for registration. Having done so, it steps back — the sponsor does not run the schemes.
The trustees hold the fund's assets in trust for the unit holders and supervise the AMC on their behalf. They are the layer that exists to protect investors, and they answer to SEBI for doing it. A trustee company's board, or the board of trustees, carries this duty.
The asset management company manages the money. It employs the fund managers, makes the investment decisions within the scheme's stated objective, and charges the scheme a fee for doing so. It works under the trustees' supervision and inside SEBI's rules, not on its own judgement alone.
Why keep them separate?
Because the money is the investors'. If the entity that decided where to invest also held the securities and kept the records, a failure or a fraud at that entity would put everything at risk at once. Splitting the roles means the AMC can be replaced without the assets moving, and the assets can be verified without asking the AMC.
This is also why the trustees' duty runs to the unit holders rather than to the sponsor that appointed them. The structure is only worth anything if the supervising layer is answerable to the people whose money it is.
Who else is involved?
- The custodian holds the scheme's securities in safekeeping, separately from the AMC's own assets. It is registered with SEBI.
- The registrar and transfer agent maintains unit holder records: processing applications and redemptions, updating folios and issuing account statements.
- The auditor audits the scheme's accounts, which are separate from the AMC's own accounts.
- The distributor sells the schemes. It is a channel appointed by the AMC, not a tier of the fund.
The distinction between the custodian and the registrar is worth fixing in your head, because it is a natural place for a question. One holds securities. The other holds records about people. They are not versions of the same job.
What the examination tends to ask here
Unit 2 is four per cent of the paper, so roughly four questions, and they are almost always about who does what. Name the three tiers; say what the custodian holds; say what the RTA handles; identify which parties are constituents of the fund and which are service providers to it.