Legal Structure of Mutual Funds in India for NISM certification
A mutual fund in India is not a company: it is a trust, run through a three-tier structure that keeps the money, the managers and the supervisors apart. This chapter maps who does what and why.
Mutual FundsSeries V-A60 MCQs5 lessons15 flashcards4 memory tricks
Practise Legal Structure of Mutual Funds in India free
What you'll learn
- The three-tier structure
Draw the sponsor–trustee–AMC structure and say why it exists. - The sponsor
State what a sponsor does and the key eligibility tests. - Trustees
Describe how trustees are constituted and what they must do. - The AMC
Explain the AMC's role, net worth requirement and restrictions. - Service providers and AMFI
Name each service provider's job and AMFI's role.
Concepts explained
The three-tier structure
A mutual fund has a sponsor (promoter), trustees (guardians of unit holders) and an AMC (manager); separating them protects investors.
What it means
- Sponsor sets up the trust and the AMC and contributes at least 40% of the AMC's net worth.
- Trustees: at least 4, at least two-thirds independent; they supervise the AMC.
- AMC: net worth at least ₹50 crore; at least 50% independent directors.
- 'Holds the assets for unit holders' → trustees
- 'Manages the schemes' → AMC
- 'Promotes and sets up the fund' → sponsor
Answer: Match the verb to the tier
Related terms
- Trust deed: document by which the sponsor creates the trust
- Investment management agreement: contract between trustees and the AMC
Exam tip: Watch for fractions: two-thirds for trustees, one-half for the AMC board, 40% for sponsor contribution.
Custodian vs registrar and transfer agent
The custodian keeps the scheme's securities; the RTA keeps the investors' records.
What it means
- Custodian: safekeeping, settlement, corporate actions.
- RTA: applications, redemptions, statements, investor records.
- Both are registered with SEBI.
Related terms
- CAMS, KFin Technologies: the two large mutual fund RTAs in India
AMFI's role
AMFI is the industry association of AMCs, set up in 1995; it is not a regulator but registers distributors and sets codes of conduct.
What it means
- Issues ARN to distributors and EUIN to their employees.
- Publishes NAVs and industry data.
- Runs investor awareness campaigns.
- Represents the industry to SEBI and the Government.
Memory tricks
Sponsor promotes, trustees supervise for unit holders, AMC manages.
Sponsor ≥ 40% of AMC net worth; AMC net worth ≥ ₹50 crore; ≥ 50% independent AMC directors; ≥ 4 trustees, ≥ two-thirds independent.
Custodian holds securities; RTA keeps unit holder records.
AMC appointment can be terminated by a majority of trustees or 75% of unit holders.
Try 3 NISM-style questions
Q1. SEBI requires an AMC to invest its own money in its schemes mainly to
- Align its interests with those of unit holders ('skin in the game')
- Raise the scheme's NAV artificially before results
- Meet AMFI's membership fee
- Replace the sponsor's contribution to the AMC's net worth
Show answer
Answer: (1) Align its interests with those of unit holders ('skin in the game')
Having its own money in the scheme gives the AMC a stake in the outcome.
Q2. Mutual funds in India are constituted under which Act?
- Companies Act, 2013
- Indian Partnership Act, 1932
- Banking Regulation Act, 1949
- Indian Trusts Act, 1882
Show answer
Answer: (4) Indian Trusts Act, 1882
The trust is formed under the Indian Trusts Act, 1882 and registered with SEBI.
Q3. Which of these is a SEBI-registered intermediary in the mutual fund structure?
- AMFI
- Custodian
- Unit holder
- Trust deed
Show answer
Answer: (2) Custodian
Custodians must be registered with SEBI.
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