Legal Structure of Mutual Funds in India: formula sheet

Key formulas

NAV per unit

NAV = (Market value of assets − Liabilities) ÷ Number of units outstanding

Units are bought and sold at NAV (plus or minus load where applicable). NAV changes with portfolio value, not with demand for units.

Units allotted

Units = Amount invested ÷ Applicable NAV

Fractional units are allotted. Use the NAV applicable to the transaction.

Legal form in India

Mutual fund = Trust (sponsor creates; trustees oversee; AMC manages)

A mutual fund is not a company or partnership. SEBI regulates it.

Value of holding

Current value = Units held × Current NAV

The investor's holding value moves with NAV.

Legal form

Mutual fund in India = Trust (Indian Trusts Act, 1882) created by a registered trust deed

Unit holders are beneficiaries. The fund is not a company or a partnership.

Three-tier chain

Sponsor → Trust and Trustees → AMC (with Custodian holding securities)

Sponsor settles the trust and appoints trustees. Trustees appoint the AMC with SEBI approval.

Role matching

Sponsor = sets up | Trustees = oversee and protect unit holders | AMC = manages investments | Custodian = safekeeps securities

Most questions test which party does which job.

Ownership of scheme assets

Legal owner = Trustees | Beneficial owners = Unit holders

The sponsor and the AMC do not own scheme assets.

Custodian role

Custodian = safekeeping of securities + settlement + corporate action and income collection

It does not take investment decisions. It must be independent of the sponsor.

RTA role

RTA = unit holder records + transaction processing + statements + payouts

CAMS and KFintech are examples. An outside RTA must be SEBI registered.

Fund accountant role

Fund accountant = scheme books + NAV computation

Often outsourced by the AMC.

Auditor independence

Auditor of the fund ≠ auditor of the AMC

The fund's auditor must be a different person or firm from the AMC's auditor.

Depository role

Depository (NSDL, CDSL) = holding units in demat form

Holding units in demat is the investor's option.

Primary regulator

SEBI → SEBI (Mutual Funds) Regulations, 1996

Governs registration, schemes, investment limits, valuation, expenses and disclosures.

Nature of AMFI

AMFI = self-regulatory industry body of AMCs

Not a statutory regulator. Issues code of conduct and manages distributor registration and ARN.

ROC role

ROC → incorporation and filings of AMC and trustee company

Applies because they are companies. It does not regulate schemes.

RBI role

RBI → banking and money-market links

Relevant to bank-sponsored funds and money-market and forex rules. It is not the mutual fund regulator.

Legal form of a mutual fund

Mutual fund = Trust (Indian Trusts Act, 1882) + registered trust deed (Indian Registration Act, 1908)

Not a company, not a society, not a partnership. This is a favourite MCQ.

Who does what

Sponsor → creates trust | Trustees → hold property, supervise | AMC → manages | Custodian → safekeeps securities

The sponsor is like the settlor. Trustees are the legal holders for unit holders.

Key documents

Trust deed: sponsor ↔ trustees | IMA: trustees ↔ AMC

Match the document to the two parties. The IMA is signed by the trustees, not by the sponsor.

Registration chain

Fund registered with SEBI first → scheme approved by trustees → draft offer document filed with SEBI by AMC → launch

Registration applies to the fund. Offer document filing applies to each scheme.

Sponsor eligibility (benchmarks)

At least 5 years in financial services | sponsor contributes at least 40% of AMC's net worth

Learn these two numbers. Check the latest NISM workbook for other conditions.

Quick revision

• A mutual fund pools money from many investors and invests it in a portfolio.
• In India, a mutual fund is set up as a trust and registered with SEBI.
• The structure has three tiers: sponsor, trustees and AMC.
• The sponsor sets up the fund and is the person who creates the trust.
• Trustees hold the fund's property for the benefit of unit holders and oversee the AMC.
• The AMC manages the money and runs the schemes.
• The custodian keeps the securities safe and the registrar handles unit records and transactions.
• SEBI is the regulator of mutual funds.
• AMFI is the industry body that sets standards and runs distributor registration.
• Investors in a scheme are unit holders and share its gains and losses in proportion to their units.
• Check each condition against your NISM workbook before the exam.
• The exam has no negative marking, so attempt every question.

Common mistakes

• Thinking a mutual fund is a company whose shares you buy. Fix: Remember: the fund is a trust, you hold units, and the AMC is only the manager.
• Believing mutual funds guarantee returns or protect capital. Fix: Returns depend on market performance. Only the scheme's disclosed features apply; no return is assured.
• Treating the sponsor and the trustees as the same party. Fix: The sponsor only sets up the fund and appoints trustees. The trustees oversee the fund and protect unit holders.
• Saying the AMC owns the scheme assets. Fix: The trustees hold the assets in trust for unit holders. The AMC only manages them under trustee supervision.
• Saying the custodian maintains unit holder records. Fix: Custodian keeps securities. RTA keeps unit holder records.
• Thinking the custodian decides which securities the scheme buys. Fix: Investment decisions belong to the AMC under trustee oversight. The custodian only holds and settles.
• Saying AMFI is a regulator that makes mutual fund law. Fix: Remember AMFI is a self-regulatory industry body. SEBI is the regulator that frames the Regulations.
• Thinking RBI regulates mutual fund schemes. Fix: RBI affects banking and money-market conditions. Mutual funds are regulated by SEBI.
• Saying a mutual fund is a company under the Companies Act. Fix: Remember: the fund is a trust. Only the AMC (and a trustee company, if used) is a company.
• Saying the IMA is signed between the sponsor and the AMC. Fix: The IMA is between the trustees and the AMC. The sponsor signs the trust deed.

Exam tips

• Expect direct questions on the definition, the trust form and the meaning of units. Learn these in one line each.
• Questions on advantages and limitations often put one limitation among three advantages. Classify each option before choosing.
• Be alert to words like 'guaranteed' or 'eliminates'. They usually mark the wrong option.
• NAV calculation questions are simple. Divide carefully and watch the units. Series V-A has no negative marking, so always attempt every question.
• Link the role of mutual funds to savings mobilisation, capital market depth and access for small investors.
• Expect role-matching questions. Learn one job per party and watch for swapped roles in options.
• Remember the legal form: a trust under the Indian Trusts Act, 1882, not a company.
• Questions on ownership usually have trustees as legal holders and unit holders as beneficiaries.