NISM-Series-V-A: Mutual Fund Distributors · Legal and Regulatory Framework

Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian

Updated 11 October 2026 · Fact-checked

An Indian mutual fund has a three-tier structure: the sponsor sets up the fund as a trust, the trustees hold the assets for unitholders and oversee the fund, and the AMC manages the schemes. A custodian keeps the securities safe, and a registrar handles unit records. Learn who does what and the limits.

Understand Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian

A mutual fund in India is set up as a trust and registered with SEBI. The trust is not a company. The people and entities around it have separate jobs, and the exam tests whether you can match each job to the right party.

The sponsor is the person or entity that creates the fund. Think of the sponsor as the settlor of the trust. The sponsor appoints the trustees and, with the trustees, sets up the AMC. The sponsor must meet a track record test and must hold a minimum stake in the AMC.

The trustees hold the fund's property in trust for the benefit of unitholders. They are the watchdog. They sign the investment management agreement with the AMC, check that the AMC follows the rules, and answer to SEBI. The AMC (Asset Management Company) is the manager. It runs the schemes, picks investments and handles day-to-day operations for a fee, under the trustees' supervision.

Support providers sit around these three. The custodian holds the securities and handles their safekeeping and settlement. The registrar and transfer agent (RTA) issues and redeems units, keeps unitholder records and sends statements. Independence is the theme for trustees: at least two-thirds of the trustees must be independent of the sponsor.

A quick memory line: sponsor creates, trustees guard, AMC manages, custodian keeps, registrar records.

Key formulas to remember

Legal form: Mutual fund = trust (Indian Trusts Act, 1882) registered with SEBI; Unitholders are the beneficiaries. The trustees hold the assets, not the AMC.
Sponsor track record: Business in financial services ≥ 5 years; positive net worth in each of the preceding 5 years; net profit in 3 of the preceding 5 years including the fifth; Also the sponsor's net worth in the preceding year must exceed its capital contribution to the AMC, and it needs a reputation for fairness and integrity.
Sponsor stake in AMC: Sponsor contribution ≥ 40% of the AMC's net worth; The sponsor must contribute at least 40% to the net worth of the AMC. A person holding 40% or more of the AMC's net worth is deemed a sponsor, provided it also meets the other conditions in the definition.
Trustee board independence: Independent trustees ≥ 2/3 of the board of trustees; Independent means not associated with the sponsor in any manner. At least two-thirds of the trustees must be independent.
AMC and trusteeship: AMC cannot act as a trustee of any mutual fund; Keeps managing and supervising roles separate.
Custodian disqualification: A custodian cannot act for a fund of the same sponsor (or its associates or subsidiary) if the sponsor or its associates hold 50% or more of the custodian's voting rights, or 50% or more of its directors represent the sponsor's or associates' interest. The custodian must be registered with SEBI.; This is a threshold test, not a blanket ban. A sponsor-group entity below the 50% limits is not barred by this rule.

How to solve Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian questions

Most questions on this topic ask you to match a function, a limit or a prohibition to the right party. Use this method.

1Read the question stem and underline the party or the function asked about: sponsor, trustee, AMC, custodian or registrar.
2Decide the party's core role: sponsor creates, trustee supervises, AMC manages, custodian safekeeps, registrar records.
3Check whether the question is about eligibility, duty or prohibition. Eligibility points to numbers: 5 years, 40%, two-thirds.
4Recall the exact number or rule for that party from your formula list.
5Eliminate options that give one party another's job, such as the AMC supervising itself or the trustee picking stocks.
6For calculation-style questions, work the fraction or percentage fully and round up when a count of people is needed.
7Confirm only one option remains and that it matches the condition in the stem exactly.

Quickest way: Role-match shortcut

When to use it: Use when you have under a minute per question and the options mix up the parties.

Ask: who creates, who guards, who manages, who keeps, who records?
Spot the verb in the stem: set up, hold in trust, manage investments, safekeep, maintain records.
Pick the party for that verb and cross out options naming anyone else.
If a number is asked, match it to the party: 40% sponsor, two-thirds trustees.

Common mistakes in Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian

Mixing up the AMC holding the fund's assets with the trustees holding them.
The AMC looks like the main operator, so students assume it owns everything.
Fix: Trustees hold the property in trust for unitholders. The AMC only manages the investments.
Treating the sponsor and trustee as the same party.
Both sit above the AMC and both are linked to setting up the fund.
Fix: The sponsor is the settlor who creates the fund. The trustees are the supervisors who protect unitholders.
Mixing up 40% and two-thirds.
Both are fractions linked to governance, so they blur together.
Fix: 40% is the sponsor's minimum contribution to the AMC's net worth. Two-thirds is the share of independent trustees.
Thinking a custodian linked to the sponsor is always barred.
Students remember independence as a theme and turn it into a blanket ban.
Fix: The bar applies only on the 50% test. A custodian cannot act for a fund of the same sponsor (or its associates or subsidiary) if the sponsor or its associates hold 50% or more of its voting rights, or 50% or more of its directors represent their interest. The custodian must also be registered with SEBI.
Giving the registrar's job to the custodian.
Both are service providers and both 'keep' something.
Fix: Custodian keeps securities. Registrar keeps unitholder records and processes units.
Rounding down when finding the number of independent trustees.
Students drop the decimal, for example 3.33 becomes 3.
Fix: You need at least two-thirds, so round up to the next whole number.

Worked examples

Example 1

A board of trustees has 7 members. What is the minimum number who must be independent of the sponsor? (a) 3 (b) 4 (c) 5 (d) 6

Show the solution

The rule: at least two-thirds of the trustees must be independent.
Compute two-thirds of 7: 7 × 2 ÷ 3 = 4.67.
You cannot have a fraction of a person, and the number must be at least 4.67, so round up to 5.
Check: 4 of 7 is 57%, below two-thirds. 5 of 7 is 71%, above two-thirds.

Answer: (c) 5

Example 2

Which statement about the mutual fund structure is correct? (a) The AMC holds the scheme's property in trust (b) The sponsor must be independent of the AMC (c) The trustees hold the fund's property for unitholders and oversee the AMC (d) The custodian manages the scheme's investments

Show the solution

Option (a) is wrong: the trustees hold the property, not the AMC.
Option (b) is wrong: the sponsor contributes at least 40% to the AMC's net worth and is closely associated with the AMC, so it is not independent of it.
Option (d) is wrong: the custodian safekeeps securities and does not manage investments.
Option (c) matches the trustee role: holding property for unitholders and supervising the AMC.

Answer: (c) The trustees hold the fund's property for unitholders and oversee the AMC

Exam tips

Learn the numbers as a set: 5 years, 3 of 5 years profit, 40% sponsor contribution to the AMC's net worth, two-thirds independent trustees. Questions often swap them as trap options.
Many questions ask 'who is responsible for...'. Answer from the role line: creates, guards, manages, keeps, records.
Watch the words 'cannot' and 'must'. Prohibition questions, such as the AMC acting as trustee, are common.
V-A has no negative marking, so never leave a question blank. Eliminate wrong roles and guess from what remains.

Practice questions from Legal and Regulatory Framework

Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian in other exams

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

Mutual Fund Structure: Sponsor, Trustee, AMC and Custodian: frequently asked questions

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

The sponsor creates the mutual fund and sets up the trust and the AMC. The trustees hold the fund's property for unitholders and supervise the AMC. The sponsor builds the structure, and the trustees protect investors within it.

What are the eligibility criteria to be a mutual fund sponsor under SEBI rules?

The sponsor needs a sound track record and a reputation for fairness and integrity. It must have at least 5 years in financial services, positive net worth in each of the preceding 5 years, and net profit in 3 of those 5 years including the fifth. It must also contribute at least 40% to the net worth of the AMC.

What does the AMC do in a mutual fund?

The AMC manages the schemes. It makes investment decisions, runs operations and earns a fee under an agreement with the trustees. It works under trustee supervision and cannot itself act as a trustee of any mutual fund.

What is the role of the custodian and the registrar?

The custodian holds the scheme's securities and handles safekeeping and settlement. It must be registered with SEBI. It cannot act for a fund of the same sponsor (or its associates or subsidiary) if the sponsor or its associates hold 50% or more of its voting rights, or 50% or more of its directors represent their interest. The registrar and transfer agent issues and redeems units and maintains unitholder records.