4.1 Structure of Mutual Funds in India

Why a Trust

A mutual fund in India is not a company and not a partnership. It is a trust, created by a trust deed registered under the Indian Registration Act and governed by the Indian Trusts Act, 1882, and registered with SEBI.

The trust form is deliberate. In a trust, legal ownership of the assets sits with the trustees, while the beneficial interest — the right to the economic benefit — sits with the beneficiaries, who are the unitholders. The consequence matters enormously:

Scheme assets belong to the trust for the benefit of unitholders. They are not assets of the sponsor or of the asset management company, and they are not available to the creditors of either.

If a sponsoring bank fails or an AMC becomes insolvent, the securities held in its schemes are not part of that estate. They remain with the trust and, in practice, the schemes are transferred to another AMC with SEBI's approval. This is the single most important structural fact in the chapter.

The Three Tiers

Tier 1 — The Sponsor

The sponsor is the promoter: the entity that establishes the mutual fund, appoints the trustees, sets up the AMC and applies to SEBI for registration. A sponsor may be a bank, a financial institution, a corporate group or a foreign asset manager.

SEBI prescribes eligibility to ensure sponsors are substantial and durable rather than opportunistic:

• A sound track record in financial services, conventionally at least five years, with positive net worth in each of those years and profitability in a majority of them
• A general reputation for fairness and integrity in business transactions
• Contribution of at least 40% of the net worth of the asset management company
• Status as a fit and proper person under SEBI's criteria

SEBI has more recently also provided an alternative route based on committed capital rather than a long profitability record, so that well-capitalised new entrants are not excluded, together with a lighter framework for passive-only fund houses.

Once the fund is established, the sponsor has no role in day-to-day management and no claim on scheme assets. It appoints, it capitalises, and thereafter it stands back.

Tier 2 — The Trustees

The trustees hold the fund's property in trust for unitholders. Trusteeship may be discharged by a board of trustees or, more commonly, by a trustee company whose directors act as trustees.

SEBI requires that:

• There be at least four trustees
• At least two-thirds be independent, meaning not associated with the sponsor in any way
• Appointment of trustees requires SEBI's prior approval

The trustees are the investors' representatives inside the structure, and their duty is fiduciary — owed to unitholders, not to the sponsor that appointed them. Their core obligations are to ensure the AMC manages schemes in accordance with the trust deed, the regulations and the Scheme Information Document; to review compliance and transactions; to ensure no conflict of interest harms unitholders; and to report periodically to SEBI.

Tier 3 — The Asset Management Company

The AMC is a company appointed by the trustees, with SEBI's approval, to manage the schemes. It employs the fund managers, dealers and analysts; it makes investment decisions within the stated mandate; it markets the schemes; and it is paid a management fee from scheme assets.

SEBI requires the AMC to maintain a minimum net worth of INR 50 crore and that at least 50% of its board be independent directors. An AMC may not act as a trustee of the same mutual fund, and its independent directors may not be associated with the sponsor.

How the Tiers Relate

         SPONSOR
     (establishes, capitalises, appoints)
            |
     +------+------+
     |             |
  TRUSTEES  -->  AMC
 (hold assets   (manages portfolio
  for unit-      under trustee
  holders)       oversight)
     |
 UNITHOLDERS  (beneficiaries)

The deliberate separation means no single party can both control the assets and decide how they are invested. The AMC decides investments but never holds the assets — those sit with an independent custodian, appointed by the trustees. The trustees oversee but do not manage. The sponsor capitalises but does neither.

The Regulatory Framework Has Just Changed

For nearly three decades this structure was set out in the SEBI (Mutual Funds) Regulations, 1996. Those regulations were repealed with effect from 1 April 2026 and replaced by the SEBI (Mutual Funds) Regulations, 2026, notified in January 2026.

The 2026 Regulations are a consolidation and restatement rather than a redesign. SEBI's stated intent was clearer structure, simplified language and removal of overlapping clauses while retaining the core principles and safeguards. Sponsor eligibility was presented in consolidated form, and the roles and responsibilities of AMCs and trustees were reorganised under common thematic headings. Existing registrations, schemes, actions and approvals continue under the corresponding provisions of the new regulations.

For a candidate, the practical position is: the three-tier trust structure, the trustee independence requirements and the separation of assets are unchanged, but the operative instrument is now the 2026 Regulations. Study material printed before 2026 will cite the 1996 Regulations throughout.