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Capital Market and Securities Laws · Mutual Funds

Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian

Updated 11 October 2026 · Fact-checked

A mutual fund is a trust-based vehicle that pools money from many investors and invests it in securities for their benefit. Its structure has a sponsor who sets up the fund, a trust run by trustees who hold the assets, an asset management company that manages investments, and a custodian that keeps the securities safe.

Understand Mutual Funds: Concept, Structure and Constituents

A mutual fund collects small amounts of money from many investors and invests the pool in shares, bonds, money market instruments and other securities. Investors get units in proportion to what they put in. Profit or loss is shared by unitholders in that proportion. The fund is managed by professionals, so an investor does not have to pick securities.

In India, a mutual fund is set up as a trust. This is the key point for exams. The fund is not a company. The investors' money belongs to the trust and is held for the unitholders. The trust is not the manager of the money. That job is given to a separate company.

The structure is often called a three-tier structure: sponsor, trust with its trustees, and the asset management company (AMC). The custodian is a further constituent that holds the securities. Each has a separate role, and this separation protects investors. The person who manages the money does not also hold it, and the trustees watch over the AMC.

The flow works like this. The sponsor creates the mutual fund and settles the trust. The trustees hold the trust property for unitholders and supervise the fund. The AMC is appointed to manage the schemes and invest the money. The custodian keeps the securities and handles their safe holding and delivery.

Under the SEBI Act, 1992, no person may sponsor or carry on a collective investment scheme, including a mutual fund, without a certificate of registration from SEBI (section 12(1B)). So registration comes first, and then the structure operates under the SEBI (Mutual Funds) Regulations.

Key rules to remember

Three-tier structure
Sponsor → Trust (Trustees) → Asset Management Company; Custodian holds securities
Learn this order. The sponsor creates, trustees hold and supervise, the AMC manages, the custodian safekeeps.
Legal form of a mutual fund
Mutual fund = a trust, not a company
Unitholders are beneficiaries of the trust. The AMC is a company, but the fund itself is the trust.
Registration requirement (SEBI Act, section 12(1B))
No person shall sponsor or carry on a venture capital fund or collective investment scheme, including mutual funds, without a SEBI certificate of registration
Quote this when asked about the legal basis for registration.
Penalty for AMC failure (SEBI Act, section 15E)
Penalty not less than ₹1 lakh, up to ₹1 lakh per day of continuing failure, maximum ₹1 crore
Applies where an AMC fails to comply with regulations restricting its activities.
Penalty for running a mutual fund without registration (section 15D(a))
Penalty not less than ₹1 lakh, up to ₹1 lakh per day, maximum ₹1 crore
The same range applies to the other defaults listed in section 15D.

How to solve Mutual Funds: Concept, Structure and Constituents questions

Use this method for any question on the concept, structure or constituents of a mutual fund.

  1. 1Define a mutual fund first: a pool of investors' money, invested by professionals, with returns shared in proportion to units held.
  2. 2State that it is set up as a trust and draw the three tiers: sponsor, trustees and AMC, plus the custodian.
  3. 3Explain each constituent in order: who it is, what it does, and how it differs from the others.
  4. 4Point out the checks: the AMC manages, the trustees supervise, the custodian holds securities. No one body does everything.
  5. 5Link to law: registration with SEBI under section 12(1B) of the SEBI Act, and the SEBI (Mutual Funds) Regulations for details.
  6. 6Mention the consequence of default if asked: penalties under sections 15D and 15E.
  7. 7End with a one-line conclusion that answers the exact question asked.

Quickest way: Remember it as S-T-A-C

When to use it: Use it when you have little time and the question asks you to list or explain the constituents of a mutual fund.

  1. Write S for Sponsor: creates the fund and settles the trust.
  2. Write T for Trust and Trustees: hold property for unitholders and supervise the AMC.
  3. Write A for AMC: manages schemes and invests the money.
  4. Write C for Custodian: safekeeps securities.
  5. Add one line each on the trust form and SEBI registration, then conclude.

Common mistakes in Mutual Funds: Concept, Structure and Constituents

  • Saying a mutual fund is a company

    The AMC is a company, so students mix up the AMC and the fund.

    Fix: Write that the fund is a trust and the AMC is only its manager, appointed to run the schemes.

  • Treating sponsor and trustee as the same

    Both seem to be at the top of the structure.

    Fix: The sponsor sets up the fund and settles the trust. The trustees hold the trust property for unitholders and supervise. Different roles, different persons.

  • Saying the AMC holds the investors' securities

    The AMC makes the investments, so students assume it also keeps them.

    Fix: Securities are kept by the custodian. The AMC decides what to buy or sell.

  • Leaving out the custodian from the structure

    The classic three tiers name only sponsor, trust and AMC.

    Fix: Name the three tiers, then add the custodian as a key constituent with its safekeeping role.

  • Quoting penalty amounts without the conditions

    Students remember the figure ₹1 crore only.

    Fix: State the full range: not less than ₹1 lakh, up to ₹1 lakh per day of continuing failure, subject to a maximum of ₹1 crore.

Worked examples

Example 1

Explain the three-tier structure of a mutual fund in India and the role of each constituent.

Show the solution
  1. Provision: A mutual fund pools money from investors and invests it in securities. In India it is set up as a trust and must be registered with SEBI under section 12(1B) of the SEBI Act, 1992.
  2. Tier one, the sponsor: the person who sets up the mutual fund and settles the trust. It is the founder of the structure.
  3. Tier two, the trust and trustees: the trust holds the fund's property for the benefit of unitholders. The trustees supervise the fund and the AMC and protect unitholders' interests.
  4. Tier three, the AMC: appointed to manage the schemes. It makes the investment decisions and runs the day-to-day operations.
  5. Custodian: keeps the securities of the schemes safe, separate from the AMC.
  6. Analysis: The roles are separated so that no single body manages, holds and supervises the money. This protects investors.

Answer: A mutual fund is a SEBI-registered trust with three tiers. The sponsor creates it, the trustees hold its property and supervise it, and the AMC manages the schemes. The custodian safekeeps the securities. This separation of functions protects unitholders.

Example 2

An AMC of a registered mutual fund fails to comply with regulations restricting its activities, and the failure continues for 200 days. What penalty can apply, and under which provision?

Show the solution
  1. Provision: Section 15E of the SEBI Act, 1992 applies where an AMC of a registered mutual fund fails to comply with regulations restricting its activities.
  2. The penalty must not be less than ₹1 lakh. It may extend to ₹1 lakh for each day the failure continues, subject to a maximum of ₹1 crore.
  3. Compute the upper limit by the daily rate: 200 days × ₹1 lakh = ₹2 crore.
  4. Apply the cap: ₹2 crore exceeds ₹1 crore, so the maximum is limited to ₹1 crore.
  5. Conclusion: the penalty cannot be less than ₹1 lakh and cannot exceed ₹1 crore.

Answer: Under section 15E, the penalty is at least ₹1 lakh and can extend up to ₹1 crore. The daily rate gives ₹2 crore, but the statutory cap of ₹1 crore applies.

Exam tips

  • Begin every answer with the definition and the trust form. Examiners look for it.
  • Draw a small flow of sponsor, trust, AMC and custodian. It makes the answer clear and quick to read.
  • For a distinction question, write role, function and relationship to unitholders for sponsor and trustee side by side in sentences.
  • Cite section 12(1B) for registration and sections 15D and 15E for penalties, with the exact amounts and cap.
  • Always finish with a short conclusion that answers the question asked.

Practice questions from Mutual Funds

Mutual Funds: Concept, Structure and Constituents in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Mutual Funds: Concept, Structure and Constituents: frequently asked questions

What is the difference between a sponsor and a trustee in a mutual fund?

The sponsor is the person who sets up the mutual fund and settles the trust. The trustees hold the trust property for unitholders and supervise the fund and the AMC. The sponsor creates the structure, while the trustees protect investors within it.

Is a mutual fund a company or a trust in India?

A mutual fund in India is set up as a trust. The AMC that manages it is a company, but the fund itself is the trust. Unitholders are the beneficiaries.

What does the custodian do in a mutual fund?

The custodian keeps the securities of the mutual fund schemes safe. It is separate from the AMC, which only makes the investment decisions. This separation adds a layer of protection for unitholders.

Does a mutual fund need SEBI registration?

Yes. Section 12(1B) of the SEBI Act, 1992 says no person shall sponsor or carry on a collective investment scheme, including mutual funds, without a certificate of registration from SEBI. Running one without registration attracts a penalty under section 15D.