Trust deed
Also written Trust deed (indenture of trust)
The registered instrument, executed by the sponsor in favour of the trustees, that constitutes a mutual fund as a trust, names its first trustees and governs its operations under clauses SEBI prescribes.
In plain language
In India a mutual fund is not a company. It is a trust, governed by the Indian Trusts Act, 1882. A trust needs a founding document, and for a mutual fund that document is the trust deed.
The workbook describes it in two places. The mutual fund trust is created by one or more sponsors, and its operations are governed by a trust deed executed between the sponsors and the trustees. More formally, the instrument of trust is a deed, duly registered under the Indian Registration Act, 1908, executed by the sponsor in favour of the trustees named in it.
Three things follow from the deed:
- SEBI lays down clauses that must be part of it — the sponsor cannot write whatever it likes.
- It names the first trustees, and prescribes the procedure for changing trustees.
- It sets the frame within which the AMC operates: the AMC must ensure that scheme investments are not contrary to the SEBI regulations and the trust deed.
The beneficiaries of the trust are the unit-holders. The trustees act for them; the deed defines the trust they act within.
How it works
Where the trust deed sits in the structure:
| Party | Relationship to the deed |
|---|---|
| Sponsor | Creates the trust and executes the deed in favour of the trustees; applies to SEBI for registration |
| Trustees | Named in the deed; hold the trust's property for the unit-holders; can be individuals (Board of Trustees) or a trustee company |
| Unit-holders | Beneficiaries of the trust |
| AMC | Appointed to manage the schemes; must keep investments within the regulations and the trust deed |
| Custodian | Appointed by the trustees under a custodial agreement |
The deed also matters on the AMC's appointment, and the workbook states that rule two ways. Section 3.1 says the AMC "is appointed by the sponsor or the Trustees". Section 3.2.4 is more precise: "the sponsor or, the trustees if so authorized by the trust deed, shall appoint the AMC with the approval of SEBI". The second reading makes the trust deed the source of the trustees' power to appoint.
Once appointed, the AMC can be removed by a majority of the trustees or by 75 per cent of the unit-holders, with SEBI's and the unit-holders' prior approval.
The deed reappears in Chapter 9 from the investor's side: when a trust invests in a mutual fund, its own trust deed must permit that investment, or it cannot invest.
A worked example
A financial services group wants to launch a mutual fund. It has been in financial services for more than 5 years and has had positive net worth in each of the preceding 5 years, meeting the workbook's sponsor tests. Here is the sequence the trust deed anchors. Names and amounts are illustrative.
- The group, as sponsor, executes a trust deed in favour of Sahyadri Trustee Company Ltd, named in it as trustee, and registers it under the Indian Registration Act, 1908. SEBI's mandatory clauses are included.
- The sponsor applies to SEBI for registration of the mutual fund.
- The AMC is appointed — by the sponsor, or by the trustees if the deed authorises them — with SEBI's approval. The trustees sign the investment management agreement with it.
- The trustees appoint the custodian.
Two years later, investors in one scheme holding units worth Rs 900 crore out of Rs 1,200 crore — exactly 75 per cent — are unhappy with the AMC. That is enough, under the workbook's rules, to terminate the AMC's appointment, subject to SEBI's prior approval.
Separately, a charitable trust in Pune wants to invest Rs 50 lakh of its surplus in a liquid fund. The AMC's registrar will ask for the charitable trust's own trust deed: if it does not provide for such investments, the investment cannot be made — and in some states the Charity Commissioner's permission is also needed.
Why NISM asks about it
Chapter 3 (Legal Structure of Mutual Funds), sections 3.1 and 3.2.3, describes the trust structure and the trust deed; Chapter 9 uses the investing trust's deed in institutional documentation. Expect a question on who executes the deed and in whose favour, which Act mutual funds are governed by, where the first trustees are named, and who the beneficiaries of the trust are — the Chapter 3 sample question answer being unitholders.
Common exam traps
- Executed by the sponsor in favour of the trustees — not by the AMC, and not by SEBI.
- Registered under the Indian Registration Act, 1908; mutual funds as trusts are governed by the Indian Trusts Act, 1882. Keep the two Acts apart.
- SEBI prescribes clauses that must be in the deed.
- The first trustees are named in the deed, which also sets the procedure for changing them.
- Beneficiaries are the unit-holders, not the sponsor or the AMC.
- AMC appointment: the workbook says both "by the sponsor or the Trustees" and "the sponsor or, the trustees if so authorized by the trust deed … with the approval of SEBI". The fuller version is the safer answer.
- The deed is also the document an investing trust must show to prove it may invest in mutual funds.
Where this is taught
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series V-A · Chapter 3: Legal Structure of Mutual Funds in Indiaintroduced here
- Series II-B · Chapter 9: Structure and Constituents of Mutual Fundsintroduced here
- Series III-A · Chapter 20: SEBI (Debenture Trustees) Regulations, 1993introduced here
- Series V-D · Chapter 3: Legal Structure of Mutual Funds in Indiaintroduced here
- Series V-B · Chapter 3: Legal Structure of mutual fundsintroduced here
- Series XIX-E · Chapter 6: Alternative Investment Fund Structuringintroduced here
Related terms
- Asset Management CompanyThe company that runs a mutual fund's schemes day to day — appointed by the sponsor or trustees with SEBI's approval, and paid a fee out of the scheme rather than a share of its profits.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- Investment Management AgreementThe agreement between the trustee, acting for the AIF, and the investment manager, by which the trustee delegates its entire investment management power — and by which the manager can later be removed.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- TrusteesThe guardians of a mutual fund trust, who hold its property for the unitholders and oversee the AMC — at least two-thirds of them independent, each approved by SEBI in advance.
- In-principle ApprovalA SEBI approval granted to an eligible AIF applicant before its trust or partnership deed is registered — the deed must then be registered within 6 months, and no investor money may be called until registration.
- Pure Domestic AIFThe simplest AIF structuring template: one pool set up and registered in India under the AIF Regulations, with every investor, the manager and the sponsor all resident in India for FEMA and tax purposes.
- Ultimate Beneficial OwnerThe natural person who ultimately owns or controls a non-individual investor — over 25% of a company, over 15% of a partnership, or 15% or more of a trust's benefits — whose identity a mutual fund must verify.
- TrustA legal arrangement in which property is transferred to trustees, who hold legal title and control it for identified beneficiaries on terms set out in a trust deed.
- ProbateA copy of a will, certified under the seal of a court of competent jurisdiction, certifying that the will was proved on a certain date — the legal confirmation attached to the will it certifies.
- Hybrid trustA trust that pays a fixed, pre-decided amount to beneficiaries out of part of the trust property, while the trustee has full discretion over how the remainder is distributed.