Structure of Mutual Funds in India

A mutual fund in India is either set up as a trust under the Indian Trusts Act, 1882, or as a company under the Companies Act, 2013. The trust model is the most common; the trustee (often a bank) holds the assets on behalf of investors, ensuring segregation from the AMC’s own balance sheet.

The Asset Management Company (AMC) is a separate corporate entity registered with SEBI. It is responsible for portfolio management, investment decisions, and day‑to‑day operations of the scheme. The AMC does not own the assets; it merely manages them under a management agreement with the trustee.

At the scheme level, each mutual fund product is called a scheme. A scheme issues units to investors, maintains its own ledger of assets, liabilities and unit count, and publishes a daily Net Asset Value (NAV). The scheme exists as a contractual relationship among the trustee, AMC and unit holders, not as a separate legal person.

• Trustee – legal custodian of assets, responsible for safeguarding investor interests.
• AMC – investment manager, conducts research, makes buy‑sell decisions, and complies with SEBI regulations.

Each scheme maintains a ledger that records total assets, liabilities, and the number of units outstanding. These three figures are used to compute the daily NAV, which is the price at which investors buy or sell units.

The scheme also defines its investment objective (e.g., growth, income, or balanced) and its type of dividend policy – either growth (reinvested) or dividend (payout). These attributes are disclosed in the scheme information document (SID) and are critical for matching investor risk appetite.

For the exam, you must know that NAV is the only price used for transactions, and that it is calculated after adjusting for any accrued dividends, expenses and taxes. Mis‑reading the definition of NAV is a frequent source of error in calculation questions.

The AMC designs the investment strategy, conducts market research, and executes trades. It must file periodic reports with SEBI, maintain a compliance officer, and ensure that the scheme’s expense ratio stays within the approved limits.

The trustee acts as a fiduciary guardian. Its duties include verifying that the AMC adheres to the scheme’s investment policy, overseeing the valuation of assets, and ensuring that the assets are segregated from the AMC’s own holdings. The trustee also appoints an auditor for annual audit.

Unit holders are the ultimate owners of the scheme’s assets. They have voting rights on major decisions such as change of trustee, merger of schemes, or alteration of the investment objective. For the exam, remember that liability rests with the trustee, not the AMC, which is a common misconception.

Mutual funds are classified on several dimensions. The primary split is between open‑ended and close‑ended schemes. Open‑ended funds allow investors to buy or redeem units at any business day at the prevailing NAV, whereas close‑ended funds have a fixed tenure and units are traded on stock exchanges.

Another classification is based on the dividend option: growth (units appreciate, no cash payout) and dividend (periodic cash distribution). The choice influences tax treatment and investor cash‑flow expectations.

For NISM, you must be able to differentiate these categories, recognise the redemption mechanism, and identify which type is suitable for different investor horizons.

SEBI is the apex regulator for mutual funds. It issues the Mutual Fund Regulations, 1996 (as amended), which prescribe registration, disclosure, and operational norms for AMCs, trustees and schemes. All mutual fund entities must be registered with SEBI and comply with periodic reporting requirements.

The Association of Mutual Funds in India (AMFI) acts as a self‑regulatory organization, issuing codes of conduct, standardising terminology and facilitating investor education. While AMFI guidelines are not law, non‑compliance can attract SEBI scrutiny.

Exam questions often test knowledge of registration thresholds, mandatory disclosures in the Scheme Information Document (SID), and the consequences of SEBI violations such as penalties or suspension of the scheme.

Investor protection is reinforced through mandatory KYC (Know Your Customer) norms, segregation of assets, and periodic audits by a SEBI‑registered auditor. The trustee ensures that the AMC cannot misuse the fund’s assets for its own purposes.

In addition, SEBI mandates a minimum capital requirement for AMCs and a minimum net worth for trustees, which act as financial buffers against operational failures. These thresholds are periodically revised and are part of the certification syllabus.

For the exam, remember that any breach of segregation or KYC can lead to severe penalties, and that the trustee’s fiduciary duty is the cornerstone of investor safety.