Legal Structure of Mutual Funds in India

An Indian mutual fund is not a single organisation. It is a trust whose work is deliberately split between separate entities, and the SEBI (Mutual Funds) Regulations, 2026 — which replaced the 1996 Regulations on 1 April 2026 — keep those entities apart on purpose. For someone doing the job this is not constitutional trivia. It decides whose failure would and would not put a client's money at risk, who a complaint is ultimately answerable to, and why no one in the chain is in a position to promise anything about the securities held. The clearest way in is the three tiers.

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

Questions on this unit turn on who does what, and they are awkward precisely because every option sounds reasonable. The distinctions worth having ready are these. The sponsor establishes the fund and then steps back; it does not run the schemes, and a candidate who assumes that whoever put up the money gives the instructions will get a run of these wrong. The trustees hold the property in trust and supervise the AMC; the AMC manages and is supervised, and it may not act as trustee of a mutual fund at all. Around the tiers, the custodian holds securities while the registrar and transfer agent holds records about people — and the appointing hand differs, since the trustees appoint the custodian while the AMC appoints the registrar. That pair is easy to read past and easy to swap round. The other recurring trap is promoting the distributor into the structure: it is a sales channel appointed by the AMC, not a tier, and nothing about the trust depends on it.