4.2 Key Constituents of a Mutual Fund

The Principle Behind the Constituents

Every constituent below exists because of one rule: the party that decides what to buy must not be the party that holds it, the party that records it, or the party that values it. Separation of these functions is what makes fraud require collusion between independent entities rather than a decision by one.

The Custodian

The custodian holds the scheme's securities in safekeeping and settles all trades.

• Registered with SEBI as a custodian of securities
• Appointed by the trustees, not by the AMC
• Must be independent of the sponsor; a sponsor or its associate cannot act as custodian for that fund unless SEBI's conditions on independence are satisfied
• Handles settlement, collects corporate actions such as dividends, interest, bonus and rights, and reconciles holdings

The custodian's independence is the reason a fund manager cannot simply move securities out of a scheme. The AMC instructs; the custodian holds and settles; the records must agree.

For dematerialised holdings, the depositories — NSDL and CDSL — hold securities electronically, with the custodian operating as a depository participant.

The Registrar and Transfer Agent

The RTA is the investor-facing operational engine of the fund. It:

• Processes purchase, redemption, switch and systematic transaction requests
• Maintains the register of unitholders and allots units
• Issues account statements and consolidated account statements
• Manages folio-level non-financial changes — address, bank mandate, nomination
• Handles payouts of redemption proceeds and income distributions
• Maintains KYC linkage and processes transmission on death of a unitholder

Most Indian AMCs outsource this to a small number of large RTAs — CAMS and KFin Technologies being the principal ones. An AMC may perform the function in house, but only if it has the systems and is equipped to do so.

Because the RTA maintains the unitholder register, the date and time stamped by the RTA or an official point of acceptance determines which day's NAV applies — a link that becomes decisive in the cut-off timing rules later in the syllabus.

The Fund Accountant

The fund accountant computes the scheme's NAV each business day: valuing every holding, accruing income and expenses, and dividing net assets by units outstanding.

The function must be kept separate from fund management, because a fund manager able to influence the valuation of holdings could disguise poor performance. The role may be performed by the AMC's own segregated fund accounting team or outsourced to the custodian or a specialist provider — but the segregation of duties is mandatory either way.

The Auditors

Mutual funds carry two distinct audits, and the exam tests the distinction:

The scheme auditor must be different from the AMC's auditor. Trustee appointment of the scheme auditor is what makes the audit independent of the entity being examined — the AMC cannot choose the auditor who reviews the schemes it runs.

Bankers

Scheduled commercial banks act as collecting bankers, receiving subscription money, and as payment bankers, remitting redemption proceeds and income distributions. The banking channel is also what determines when subscription funds are actually realised and available to the scheme, which drives NAV applicability on purchase transactions.

Distributors

Distributors — individuals, firms, banks and national distributors holding an ARN — source investors, complete documentation, and provide ongoing service. They are agents of the investor in practice and are remunerated by the AMC from scheme expenses. Chapter 7 covers this in full.

Putting the Chain Together

A single purchase transaction touches most of the constituents:

1. The distributor helps the investor complete the application and submits it.
2. The application is time stamped at an official point of acceptance and captured by the RTA.
3. Funds are received through the collecting banker and realised.
4. The RTA allots units at the applicable NAV and updates the register.
5. The AMC deploys the money; the custodian settles the trades and holds the securities.
6. The fund accountant revalues the portfolio and computes the next day's NAV.
7. The scheme auditor, appointed by the trustees, examines the accounts annually.

No single entity controls that chain end to end, and that is the design.

Who Appoints Whom

The appointment lines matter more than the job descriptions, because they determine who can be removed by the party being supervised.

The examinable pattern is simple: wherever independence is the point, the trustees appoint.

When the Arrangement Changes

Unitholders are protected at the moments when these relationships change.

• A change in the fundamental attributes of a scheme — its structure, investment pattern, or terms of issue — requires prior approval from SEBI, written communication to every unitholder, and a public notice. Historically the notice had to appear in an English daily with nationwide circulation and in a newspaper of the language of the region where the fund's head office is situated; under the 2026 digital-first framework, email or SMS communication and website disclosure are permitted in place of newspaper advertisement in specified cases.
• Unitholders must be given at least 30 days to exit, and those who redeem in that window do so at the NAV applicable to the day the request is received, without exit load.

The same protective logic applies when control of an AMC changes hands. The investor's remedy is never a vote to block the change; it is a guaranteed, cost-free exit before it takes effect. A distributor's job at that moment is to explain what has changed and let the investor decide, not to assume the answer.