Trustees
Also written Trustee company · Mutual fund trustees · Mutual fund trustee
The 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 plain language
A mutual fund in India is set up as a trust. The sponsor executes a trust deed in favour of the trustees, and the investors — the unitholders — are the beneficiaries. A trust is a notional entity that can only act through its trustees, so the job of protecting the interests of the unitholders falls on them.
Trusteeship can be done in two ways. Individuals can be appointed as trustees, in which case they are jointly called the Board of Trustees. Or a trustee company can be appointed, which acts through its Board of Directors. The first trustees are named in the trust deed, which also lays down how trustees are changed.
The trustees do not run the schemes day to day — that is the AMC's job. Instead they sit above the AMC: they execute the investment management agreement with it, appoint the custodian, and make sure the fund complies with the regulations and treats investors fairly.
How it works
Under Regulation 11 of the SEBI Mutual Funds Regulations 2026, a person may be appointed trustee only if they:
| Condition | |
|---|---|
| (a) | meet the fit and proper person criteria in Schedule II of the SEBI (Intermediaries) Regulations, 2008 |
| (b) | are not a director (including independent director), officer or employee of an AMC |
| (c) | are not a trustee of any other mutual fund |
| (d) | furnish whatever information SEBI seeks |
Prior approval of SEBI is needed before a trustee is appointed, and at least two-thirds of the trustees must be independent — not associates of the sponsor, the AMC or the trustee company. The traffic runs the other way too: an AMC director cannot sit on any trustee company board, and trustees must give prior approval before a person joins the AMC's board.
The workbook lists the trustees' rights and responsibilities under six heads: appointment and termination of the AMC; conflicts of interest and broker empanelment; regulatory compliance; oversight for investor interests; additional oversight; and due diligence on matters SEBI specifies. In practice, the chapters show trustees:
- appointing the custodian and signing the custodial agreement, and appointing the scheme auditor;
- deciding the quantum of dividend and the record date — for dividends up to monthly frequency they may delegate this to AMC officials, subject to ratification at the next board meeting;
- approving a segregated portfolio, and — together with the AMC board — any restriction on redemptions;
- periodically reviewing the "in good faith" valuation of non-traded securities;
- giving prior approval, alongside SEBI, to any change in control of the AMC.
The appointment of an AMC can be terminated by a majority of the trustees or by 75 per cent of the unitholders, subject to SEBI's and the unitholders' prior approval.
A worked example
Consider a fund whose trustee company has a board of six directors. At least two-thirds must be independent, so at least four cannot be associates of the sponsor, the AMC or the trustee company.
Now the sponsor sells its controlling stake in the AMC. The change needs prior approval of the trustees and SEBI. Every unitholder receives a written communication, advertisements appear in an English national daily and a regional-language paper, and unitholders get a window of not less than 30 calendar days to exit at NAV without exit load.
Mrs Deshpande holds 12,000 units of an equity scheme that normally charges a 1 per cent exit load within a year. The NAV is Rs 45.60.
| Normal redemption | Exit on change of control | |
|---|---|---|
| Value (12,000 × 45.60) | Rs 5,47,200 | Rs 5,47,200 |
| Exit load at 1% | Rs 5,472 | Nil |
| Paid out | Rs 5,41,728 | Rs 5,47,200 |
The trustee-supervised process saves her Rs 5,472 if she decides she does not want to stay with the new owner.
If, instead, investors believed the trustees had failed in their duties, they could not sue the trust — it is a notional entity — but they can file a suit against the trustees for breach of trust.
(The 12,000 units and Rs 45.60 NAV are illustrative; the 30-day, no-exit-load and two-thirds rules are the workbook's.)
Why NISM asks about it
Chapter 3 (Legal Structure of Mutual Funds in India), sections 3.1 and 3.2, sets out who the trustees are, the Regulation 11 eligibility tests, the two-thirds independence rule and the six heads of responsibility. Chapter 4 adds the investor's right to sue trustees and the 75 per cent unitholder powers; Chapters 7 and 10 show trustees deciding dividends and approving segregation. Expect straight recall (the two-thirds figure, SEBI prior approval, who appoints the custodian) and "who does what" questions that pit the trustees against the sponsor and the AMC.
Common exam traps
- At least two-thirds of trustees must be independent. For the AMC board the figure is at least 50 per cent non-associate directors. Swapping the two is a classic error.
- A trustee cannot be an AMC director, officer or employee, or a trustee of another mutual fund.
- Investors sue the trustees, not the trust. A trust is a notional entity.
- The custodian is appointed by the trustees, not by the AMC. The scheme auditor is also appointed by the trustees, while the AMC auditor is appointed by the AMC.
- AMC termination: a majority of trustees, or 75 per cent of unitholders.
- Who appoints the AMC? The workbook says both "the AMC is appointed by the sponsor or the Trustees" (section 3.1) and "the sponsor trustees shall appoint the AMC with the approval of SEBI" (section 3.2.4). Read the option wording; SEBI approval is the common thread.
- Trustees oversee; the AMC operates. Day-to-day management of schemes is never the trustees' job.
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 V-D · Chapter 3: Legal Structure of Mutual Funds in Indiaintroduced 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.
- 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.
- Trust deedThe 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.
- Obligations of trusteesThe duties SEBI places on a mutual fund's trustees: hold scheme property in trust, review every AMC-associate transaction quarterly, and certify to SEBI half-yearly that nothing improper happened.
- Representative AssesseeThe capacity in which the trustee of an AIF set up as a trust is assessed to income tax under Sections 161 and 164 — paying on behalf of the beneficiaries so the same income is not taxed twice.
- Fair valuation principlesSEBI's ten principles requiring a mutual fund to value its holdings at realisable value, in good faith, under Board-approved and disclosed policies, so every investor entering or leaving gets a fair price.
- Distributable reservesThe profits a mutual fund scheme may pay out as dividend (IDCW): accrued profits, ignoring valuation gains but deducting valuation losses — so payouts come only from real, realised profit.
- GatingA temporary restriction on mutual fund redemptions, allowed only in a market-wide crisis, for at most 10 working days in any 90 days — and never on the first Rs 2 lakh of any redemption request.
- Valuation agencyAn independent agency whose valuation matrix mutual funds must use to price non-traded and thinly traded debt; there have to be at least two, and AMFI has appointed CRISIL and ICRA.
- Fundamental attributesThe core features of a scheme — its investment objectives, policies and terms — on which investors relied when they invested. Changing them requires notice to every unit-holder and a no-load exit at NAV.
- Time stampingThe tamper-proof stamping of every mutual fund application with location code, machine identifier, serial number, date and time at the official point of acceptance — the record that decides which NAV applies.
- AMFI Code of EthicsAMFI's code of good practice for AMCs and trustees, drawn up to supplement the SEBI code of conduct in the Fourth Schedule and set more explicit standards, from integrity to enforcement.
- Self-dealingUsing your position inside a fund house to transact with the fund itself on terms that benefit you unfairly, at the expense of the scheme and its unit holders — banned outright by the AMFI Code of Ethics.
- Significant Unit holderUnder the AMFI Code of Ethics, any entity holding 5 per cent or more of a scheme's total corpus, counting everything it controls — so its dealings with the scheme must be justified to the trustees.
- Unit Holder Protection CommitteeA committee every AMC must constitute under the SEBI Mutual Fund Regulations, 2026, whose sole remit is the interests of unit holders across all the AMC's products and services.