Legal structure of a mutual fund: the trust, explained

Q: How is a mutual fund legally set up in India?

As a trust. It is a trust under the Indian Trusts Act, registered with SEBI. This is a favourite first question.

Q: Who does the scheme's money legally belong to?

The unit holders, held in trust for them. The assets are trust property, held for the benefit of unit holders. The AMC only manages them.

Q: The three-tier structure exists mainly to:

Separate the managing of money from the holding of it. Splitting who holds the money from who manages it is the core investor protection.

Q: Within the trust, the AMC's job is to:

Manage the investments day to day. The AMC runs the schemes day to day. Custody and oversight sit with others by design.

The legal structure, a trust

A trust that holds your money

This is a high-scoring chapter because the questions are factual, not tricky. Get the structure once and the marks are yours. It starts with one word: trust.

Rules here follow the SEBI (Mutual Funds) Regulations, 1996, as amended. This is education for the NISM Series V-A exam, not financial advice.

1
A mutual fund in India is a trust, formed under the Indian Trusts Act and registered with SEBI.
2
The trust has three parts: the sponsor, the trustees, and the asset management company (AMC).
3
Your money is the trust property, held for you, the unit holder. The AMC only manages it, it does not own it.
4
The split exists for one reason: so no single party both holds and manages your money unchecked.

Rupee example

Picture a locked room. The sponsor builds it, the trustees hold the keys on your behalf, and the AMC works inside under watch. Your money sits in the room, not in anyone's pocket.

Practice

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Real exam format. Answer by voice, tap, or press 1 to 4. No negative marking, so always attempt.

Answer by voice

Tap the mic and say A, B, C or D. Typing is optional.

How is a mutual fund legally set up in India?

It is a trust under the Indian Trusts Act, registered with SEBI. This is a favourite first question.

It is not a company, partnership or bank, even though a company (the AMC) manages it.

Who does the scheme's money legally belong to?

The assets are trust property, held for the benefit of unit holders. The AMC only manages them.

Neither the AMC nor the sponsor owns your money, and SEBI regulates rather than owns.

The three-tier structure exists mainly to:

Splitting who holds the money from who manages it is the core investor protection.

It is not a tax or return device, and mutual funds are regulated by SEBI, not the RBI.

Within the trust, the AMC's job is to:

The AMC runs the schemes day to day. Custody and oversight sit with others by design.

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NISM V-A syllabus

1What a mutual fund really is

2How a fund is built

3Who watches over it

4The offer document, decoded

5Getting funds to investors

6Selling the right way

8NAV, loads and the daily price

9Types of schemes, and picking one

10Return, risk and performance

11How gains are taxed

12Serving the investor

See the full roadmap →