NISM Series V-D · Chapter 3: Legal Structure of Mutual Funds in India

L1 · Foundation

Foundation — The trust structure and its key constituents

The definition of a mutual fund, the three-tier trust structure, the eligibility and duties of sponsors, trustees, the AMC and the custodian, and the checks and balances that protect unitholders.

22 min read · Worth 2% of the paper · Written from pages 68–81 of the official NISM workbook · Updated 18 September 2026

Chapter 3 — Legal Structure of Mutual Funds in India

3.1 The definition and the structure

Four key features flowing from the definition

"It is established as a TRUST".
"It raises money through the SALE OF UNITS to the public or a SECTION of the public".
"The units are sold under ONE OR MORE SCHEMES".
"The schemes invest in SECURITIES (including money market instruments) or GOLD or gold-related instruments or SILVER or silver related instruments or REAL ESTATE ASSETS".

The structure, with its checks and balances

Element	Detail
The trust	"Mutual funds are constituted as Trusts. Therefore, they are governed by the INDIAN TRUSTS ACT, 1882".
Who creates it	"The mutual fund trust is created by ONE OR MORE SPONSORS, who are the MAIN PERSONS behind the mutual fund business".
Beneficiaries	"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, called UNIT-HOLDERS".
Governing document	"The operations of the mutual fund trust are governed by a TRUST DEED, which is executed between the SPONSORS AND THE TRUSTEES. SEBI has laid down various clauses that need to be part of the Trust Deed".
Day-to-day management	"Handled by an ASSET MANAGEMENT COMPANY (AMC). The AMC is appointed by the SPONSOR OR THE TRUSTEES".
The management contract	"The trustees execute an INVESTMENT MANAGEMENT AGREEMENT with the AMC, setting out its responsibilities".
Custody	"Although the AMC manages the schemes, CUSTODY of the assets of the scheme (securities, gold, gold-related instruments, real estate assets & silver or silver related instruments) is with a CUSTODIAN, who is appointed by the TRUSTEES".
Investor records	"May be maintained by the AMC ITSELF, or it can appoint a REGISTRAR & TRANSFER AGENT (RTA)".

Notice the deliberate separation of powers: the sponsor creates the trust, the trustees oversee it, the AMC manages the money, and an independent custodian holds the assets. No single party does all four.

3.2 Sponsors

Eligibility criteria

The sponsor must have "a SOUND TRACK RECORD and general reputation of FAIRNESS AND INTEGRITY in all business transactions", which is spelt out as:

"Carrying on business in FINANCIAL SERVICES for NOT LESS THAN 5 YEARS".
"Net worth (share capital plus reserves MINUS accumulated losses) is POSITIVE in ALL THE IMMEDIATELY PRECEDING 5 YEARS".
"Positive LIQUID NETWORTH is MORE THAN THE PROPOSED CAPITAL CONTRIBUTION of the sponsor in the asset management company" — and on a change of control by acquisition of shares, the liquid net worth or tied-up funds must equal "the aggregate PAR VALUE OR MARKET VALUE of the shares proposed to be acquired, WHICHEVER IS HIGHER".
"NET PROFIT after providing for depreciation, interest and tax in EACH of the immediately preceding five years".
"AVERAGE NET ANNUAL PROFITS after depreciation, interest and tax during the immediately preceding five years of AT LEAST RUPEES 10 CRORE".
"The sponsor should be a FIT AND PROPER PERSON".

Liquid networth is defined as "the networth deployed in LIQUID ASSETS which are UNENCUMBERED and shall include cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities".

AMFI's website lists AMCs "in terms of the CATEGORY OF THE SPONSOR, viz., Banks, Institutions, Private sector" — within banks, "predominantly Indian joint ventures, and others"; within private sector, "Indian, foreign, and predominantly Indian joint ventures".

3.3 Trustees

Regulation 11 of the SEBI Mutual Funds Regulations 2026 — a person is eligible to be a trustee only if that person:

"complies with FIT AND PROPER PERSON criteria specified in SCHEDULE II of the SEBI (Intermediaries) Regulations, 2008".
"is NOT a director (including independent director), officer or employee of an ASSET MANAGEMENT COMPANY".
"is NOT trustee of ANY OTHER MUTUAL FUND".
"furnishes all such information as may be sought by the SEBI".

The six rights and responsibilities

Appointment and termination of asset management company.
Addressing conflict of interest and broker empanelment.
Regulatory compliance and trustee responsibilities.
Trustee oversight for investor interests.
Additional trustee oversight.
"The trustees shall also exercise DUE DILIGENCE on such matters as may be specified by the Board".

3.4 The Mutual Fund Trust

Note the two statutes: the trust is governed by the Indian Trusts Act, 1882, and the deed is registered under the Indian Registration Act, 1908.

3.5 The Asset Management Company

Requirements under SEBI Mutual Fund Regulations 2026

"The DIRECTORS of the asset management company must be individuals possessing ADEQUATE PROFESSIONAL EXPERIENCE in finance and financial services related fields".
Directors and key personnel must be fit and proper under Schedule II of the SEBI (Intermediaries) Regulations, 2008.
"The board of directors... must comprise AT LEAST FIFTY PER CENT directors, who are NOT ASSOCIATES of the sponsor, or any of its subsidiaries, or the trustees".
"The directors of the asset management company (INCLUDING CHAIRMAN) shall NOT simultaneously serve on the board of a TRUSTEE COMPANY of any mutual fund". Prior approval of the trustees is required before appointing an AMC director.
"A person shall NOT simultaneously hold the office of director in MORE THAN ONE asset management company".

Net worth

Change of control

Prior approval of the trustees AND SEBI is required. Then:

"A written communication about the change in the control of the AMC is sent to EACH UNITHOLDER" — by e-mail where registered.
"An ADVERTISEMENT is given in ONE ENGLISH DAILY NEWSPAPER having nationwide circulation and, in a newspaper, published in the LANGUAGE OF THE REGION where the Head Office of the mutual fund is situated".
"The unitholders are given the OPTION TO EXIT on the prevailing NAV WITHOUT ANY EXIT LOAD within a time period NOT LESS THAN 30 CALENDAR DAYS from the date of communication".

Responsibilities and termination

The AMC "arranges for the requisite offices and infrastructure, engages employees, provides for the requisite software, handles advertising and sales promotion, and interacts with regulators and various service providers", and must "take all reasonable steps and EXERCISE DUE DILIGENCE to ensure that the investment of funds... is NOT CONTRARY to the provisions of the SEBI regulations and the trust deed".

And: "The AMCs desirous of launching Specialized Investment Fund (SIF) shall fulfill the ADDITIONAL REQUIREMENTS and meet the eligibility criteria as specified by SEBI".

3.6 The Custodian

"All custodians need to REGISTER WITH SEBI under the SEBI (CUSTODIAN) REGULATIONS 1996".
"The Custodian is appointed by the TRUSTEES. A CUSTODIAL AGREEMENT is entered into between the trustees and the custodian".
The independence rule: if the sponsor or its associates control "50 PERCENT OR MORE of the voting rights of the share capital of the custodian, or if 50 PERCENT OR MORE OF THE DIRECTORS of a custodian represent the interest of the sponsor or its associates, then, unless certain specific conditions are fulfilled, THAT CUSTODIAN CANNOT BE APPOINTED".
"An INDEPENDENT custodian ensures that the securities are indeed held in the scheme FOR THE BENEFIT OF INVESTORS–an important CONTROL ASPECT".
"The custodian also TRACKS CORPORATE ACTIONS such as DIVIDENDS, BONUSES AND RIGHTS in companies where the fund has invested".

That last duty is examined often, and the trap is to attribute it to the RTA.

Think of it like this

Four parties, four jobs — nobody holds all the keys

The structure exists, in the workbook's own words, because it "has INHERENT CHECKS AND BALANCES TO PROTECT THE INTERESTS OF THE INVESTORS." Read it as a deliberate separation of powers:

Party	Job	Appointed by
Sponsor	Creates the trust; applies to SEBI for registration; invests in the capital of the AMC	—
Trustees	Oversee — ensure compliance and protect unitholders	Named in the trust deed; prior SEBI approval required
AMC	Manages the money day to day	Sponsor or the Trustees, with SEBI approval
Custodian	Holds the assets and settles transactions	The Trustees
RTA	Maintains investor records (optional — the AMC may do it itself)	The AMC

Think of a school trust. The founder endows it, a board of governors oversees it, a principal runs it day to day, and the bank holds the money. The principal cannot quietly move the funds, because he never holds them.

That is precisely why the AMC manages but the custodian holds: "an INDEPENDENT custodian ensures that the securities are INDEED HELD IN THE SCHEME FOR THE BENEFIT OF INVESTORS–an important CONTROL ASPECT."

And the beneficiaries are never in doubt: "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, called UNIT-HOLDERS."

Two statutes and two documents — the trust's paperwork

A mutual fund lives under two Acts and is defined by two contracts, and candidates mix them up.

	Which one	Between whom
Governs the trust	Indian Trusts Act, 1882	—
Registers the deed	Indian Registration Act, 1908 (16 of 1908)	—
Trust Deed	Governs the operations of the mutual fund trust; SEBI has laid down clauses that must be in it	Executed by the SPONSOR in favour of the TRUSTEES
Investment Management Agreement	Sets out the AMC's responsibilities	Executed by the TRUSTEES with the AMC
Custodial Agreement	Custody of assets	Between the TRUSTEES and the CUSTODIAN

Notice who signs what. The sponsor signs only the trust deed — after that, the trustees are the contracting party for both the AMC and the custodian. That is the structural expression of the idea that trustees, not sponsors, protect the unitholders.

And the definition itself carries a fifth fact worth holding: "The firm must set up a SEPARATE Asset Management Company (AMC) to run a mutual fund business." The sponsor cannot manage the money directly.

Five years, five profits, ₹10 crore — the sponsor test

SEBI does not let anyone start a mutual fund. The sponsor must show "a SOUND TRACK RECORD and general reputation of FAIRNESS AND INTEGRITY", and the workbook translates that into five hard tests plus one judgement:

Test	Requirement
Experience	Business in financial services for not less than 5 years
Net worth	Positive in ALL the immediately preceding 5 years — share capital plus reserves minus accumulated losses
Liquid net worth	More than the proposed capital contribution in the AMC
Profitability	Net profit after depreciation, interest and tax in EACH of the preceding five years
Scale	Average net annual profits of at least ₹10 crore over those five years
Character	A fit and proper person

Note the doubled profit test: profit in every one of five years, and an average of ₹10 crore. A company with four excellent years and one loss fails, however large the average.

Liquid networth has its own definition — "the networth deployed in LIQUID ASSETS which are UNENCUMBERED... cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities." Unencumbered is the operative word: pledged assets do not count.

And on a change of control by acquisition, the liquid net worth or tied-up funds must match "the aggregate PAR VALUE OR MARKET VALUE of the shares proposed to be acquired, WHICHEVER IS HIGHER."

Two-thirds and one-half — the independence numbers

Two boards, two different independence thresholds, and swapping them is the classic exam error:

Board	Independence requirement
Trustee company	"AT LEAST TWO-THIRDS of the trustees... would need to be INDEPENDENT DIRECTORS who are not associates of the sponsor or the AMC or the trustee company"
AMC	"must comprise AT LEAST FIFTY PER CENT directors, who are NOT ASSOCIATES of the sponsor, or any of its subsidiaries, or the trustees"

The higher bar sits on the trustees, which makes sense — they are the watchdog.

Three further separations reinforce it. A trustee "is NOT a director (including independent director), officer or employee of an ASSET MANAGEMENT COMPANY" and "is NOT trustee of ANY OTHER MUTUAL FUND." An AMC director, including the Chairman, "shall NOT simultaneously serve on the board of a TRUSTEE COMPANY of any mutual fund." And "a person shall NOT simultaneously hold the office of director in MORE THAN ONE asset management company."

Add the approval requirements and the picture is complete: prior approval of SEBI before a trustee is appointed; prior approval of the trustees before an AMC director is appointed; and SEBI approval for the AMC itself.

₹50 crore, continuously — and it is the sponsor who must ensure it

Three things are packed in, and each is examined separately:

The figure — ₹50 crore, effective 1 January 2024
The standard — continuous, not merely at the point of registration or at year end
The duty-holder — the sponsor, not the AMC

That last allocation is the interesting one. The sponsor invested in the AMC's capital in the first place, and remains answerable for keeping it capitalised — so a sponsor cannot fund an AMC, walk away, and treat any subsequent shortfall as the AMC's problem.

It fits the chapter's wider design. The sponsor is described as "the MAIN PERSONS behind the mutual fund business", created the trust, and applied for registration. Capital adequacy is the ongoing price of that position.

The custodian holds the assets — and watches the corporate actions

Ask who tracks a bonus issue on a share the scheme owns and most candidates say the registrar. They are thinking of the wrong register.

The division is clean once you see what each one holds:

	Holds	Therefore tracks
Custodian	The scheme's securities	Corporate actions on those securities — dividends, bonuses, rights — and settles all transactions
RTA	The investor records and folios	Purchases, redemptions, unit capital updates, account statements

Two protections sit around the custodian. Registration: "All custodians need to REGISTER WITH SEBI under the SEBI (CUSTODIAN) REGULATIONS 1996", and appointment is by the trustees under a custodial agreement.

And independence, expressed as a 50% test: if the sponsor or its associates control "50 percent or more of the voting rights of the share capital of the custodian, or if 50 percent or more of the DIRECTORS of a custodian represent the interest of the sponsor or its associates", then unless specific conditions are met, that custodian cannot be appointed for the sponsor's mutual fund.

The reason is stated plainly: "An INDEPENDENT custodian ensures that the securities are indeed held in the scheme FOR THE BENEFIT OF INVESTORS–an important CONTROL ASPECT."

Who can sack the AMC: a majority of trustees, or 75% of unitholders

Two independent routes, with very different thresholds. The trustees need only a majority — they are the appointed watchdog, and the chapter says SEBI "expects Trustees to perform a key role in ensuring legal compliances and protecting the interest of investors." The unitholders need 75 per cent, a deliberately high bar for a remedy exercised directly by beneficiaries.

A parallel protection applies when control of the AMC itself changes hands. Prior approval of the trustees and SEBI is required, and then three things must happen:

	Requirement
Notice	Written communication to EACH unitholder — by e-mail where the address is registered
Publicity	An advertisement in one English daily with nationwide circulation and in a newspaper in the language of the region of the mutual fund's Head Office
Exit	The option to exit at prevailing NAV, WITHOUT ANY EXIT LOAD, over a period not less than 30 CALENDAR DAYS from the communication

Note calendar days, not business days — and note that the exit is load-free, which is the substance of the protection. An investor who bought into a fund because of who was running it is not trapped when that changes.

Key terms in this chapter

AMFI: The Association of Mutual Funds in India, the association of all registered asset management companies. It sets professional and ethical standards, represents the industry to SEBI, the Government and the RBI, runs investor awareness programmes, regulates distributor conduct including cancellation of the ARN, and allots the ARN — but it is neither a regulatory body nor a self-regulatory organisation.
AMFI Registration Number (ARN): The registration number allotted by AMFI to mutual fund distributors, which is mandatory for becoming a distributor and which AMFI may cancel for violations of its Code of Conduct.
Asset Management Company (AMC): The entity handling the day-to-day operations of a mutual fund, appointed by the sponsor or trustees with the approval of SEBI. Its board must be at least fifty per cent non-associates, its net worth at least ₹50 crore maintained continuously, and its appointment may be terminated by a majority of trustees or by 75 per cent of unitholders.
BSE-Star MF and NMF-II: The special stock exchange segments through which units of open-ended funds can be transacted — BSE-Star MF at the Bombay Stock Exchange and the NSE Mutual Fund II Platform at the National Stock Exchange.
Collecting bankers: Banks appointed by the AMC with whom the scheme’s bank accounts are maintained, enabling the collection and payment of funds. A newer category alongside them is payment aggregators — payment gateway providers, digital wallets and payment banks.
Compliance Officer: The officer responsible for ensuring all legal compliances, who signs the due-diligence certificate in scheme documents of new issues, reports directly to the head of the AMC to ensure independence, and must report any non-compliance directly and immediately to the trustees.
Credit rating agencies: Agencies rating debt securities, whose ratings fund managers use as an initial input prior to their own due diligence. Certain debt categories such as corporate bond funds and credit risk funds are defined by credit rating.
Custodian: The entity holding custody of the scheme’s assets, accepting and giving delivery of securities and settling all transactions on behalf of the schemes. It is appointed by the trustees under a custodial agreement, must register with SEBI under the SEBI (Custodian) Regulations 1996, and also tracks corporate actions such as dividends, bonuses and rights.
Custodian independence test: Where the sponsor or its associates control 50 per cent or more of the voting rights of the custodian, or where 50 per cent or more of its directors represent the sponsor’s interest, that custodian cannot be appointed for the sponsor’s mutual fund unless specific conditions are fulfilled.
Depository and Depository Participant: A depository holds securities in dematerialised form; investors deal with a depository participant rather than the depository itself, as a bank customer deals with a branch rather than a head office. India has two depositories, NSDL and CDSL, and ETF units are compulsorily held in demat form.
Execution Only Platform (EOP): Any digital or online platform facilitating subscription, redemption and switch transactions in direct plans of mutual fund schemes. No entity may operate as an EOP without registration from SEBI or AMFI. Platforms provided by registered Investment Advisers and Stock Brokers to their own clients are outside the framework.
Fit and proper person: The criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008, applying to sponsors, trustees, and the directors and key personnel of an AMC.
Fund Accountant: The service provider that calculates NAV by collecting information about the assets and liabilities of each scheme. The AMC may handle it in-house or outsource it, and no registration with SEBI is required to perform this function.
Fund accounting team: The team maintaining the books of account of each individual scheme and calculating NAV on a daily basis — distinct from the AMC’s own Accounts team, which handles the finances of the AMC.
Fund management team: The most critical function in an AMC, comprising analysts who identify investment opportunities, fund managers who evaluate them and are responsible for the scheme’s performance, and dealers who place orders with securities brokers on the fund managers’ instructions.
Investment Management Agreement: The agreement the trustees execute with the AMC, setting out the AMC's responsibilities.
KYC Registration Agency (KRA): An agency registered with SEBI under regulations issued in 2011 that establishes an investor’s identity and address once, creating a common KYC usable across SEBI registered intermediaries. KRAs must maintain confidentiality and have computerised connectivity to share data with one another.
Liquid networth: Net worth deployed in liquid assets which are unencumbered, including cash, money market instruments, Government Securities, Treasury bills and repo on Government securities.
MF Utilities India: A transaction platform created by the mutual fund industry under AMFI, allowing aggregation of an investor’s transactions across multiple mutual funds through a single platform.
Mutual fund (statutory definition): Under the SEBI (Mutual Fund) Regulations, 2026, a fund established in the form of a trust granted registration under regulation 3, which raises monies through the sale of units to the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments and other specified assets.
Registrar and Transfer Agent (RTA): The service provider maintaining investor records and folios, processing purchases, redemptions and switches, updating unit capital and issuing account statements. Its offices serve as Investor Service Centres. Appointment is by the AMC and is not compulsory, but every RTA must register with SEBI.
Risk Management Framework (RMF): SEBI’s framework under which risk management is an independent and specialised function within every AMC, requiring dedicated risk officers for investment risk, compliance risk, operational risk and cyber security.
Scheme auditor: The auditor of the mutual fund scheme accounts, appointed by the trustees. Scheme accounts are maintained independently of the AMC’s accounts, and the scheme auditor must be different from the AMC’s auditor.
Sponsor: The person or persons who create the mutual fund trust, apply to SEBI for registration and invest in the capital of the AMC. The sponsor must have five years in financial services, positive net worth in each of the preceding five years, net profit in each of those years, average net annual profits of at least ₹10 crore, positive liquid net worth exceeding the proposed capital contribution, and must be a fit and proper person.
Trust Deed: The instrument governing the operations of the mutual fund trust, executed by the sponsor in favour of the trustees and registered under the Indian Registration Act, 1908. SEBI has laid down clauses that must form part of it.
Trustees: The board of the trustee company, responsible for ensuring that the mutual fund complies with all regulations and protects the interests of unitholders. At least two-thirds must be independent directors who are not associates of the sponsor, the AMC or the trustee company, and prior approval of SEBI is required before appointment.
Valuation agencies: The agencies providing a valuation matrix for non-traded or thinly traded debt securities. At least two are required, and AMFI has appointed CRISIL Ltd. and ICRA Ltd. for the purpose.

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Original explanatory writing based on the official NISM workbook for Series V-D, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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