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CHAPTER 4 LEGAL AND REGULATORY
CHAPTER 7
CHAPTER 8
TAXATION
CHAPTER 9
INVESTOR SERVICES
CHAPTER 10 RISK, RETURN AND PERFORMANCE OF FUNDS
CHAPTER 11
MUTUAL FUND SCHEME PERFORMANCE
CHAPTER 12
MUTUAL FUND SCHEME SELECTION
APPENDIX 1: Fifth Schedule of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 [Regulations 18(22), 25(16), 68(h)]
CHAPTER 3 LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
LEARNING OBJECTIVES:
After studying this chapter, you should know about:
Ø Legal Structure of mutual funds
Ø Key Constituents of a Mutual Fund
Ø Organization Structure of Asset Management Company
Ø Role and support functions of service providers of mutual funds
3.1 Structure of Mutual Funds in India
SEBI (Mutual Fund) Regulations, 1996 as amended till date define “mutual fund” as “a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold-related instruments, silver or silver related instruments, real estate assets and such other assets and instruments as specified by SEBI from time to time.” The firm must set up a separate Asset Management Company (AMC) to run a mutual fund business.
Key features of a mutual fund that flows from the definition above are:
Ø It is established as a trust
Ø It raises money through the sale of units to the public or a section of the public
Ø The units are sold under one or more schemes
LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
Ø The schemes invest in securities (including money market instruments) or gold or gold-related instruments or silver or silver related instruments or real estate assets.
SEBI has stipulated the legal structure under which mutual funds in India need to be constituted. The structure, which has inherent checks and balances to protect the interests of the investors, can be briefly described as follows:
Ø Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian Trusts Act, 1882.
Ø The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.
Ø Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund, called unitholders.
Ø The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the sponsors and the trustees. SEBI has laid down various clauses that need to be part of the Trust Deed.
Ø The Trust acts through its trustees. Therefore, the role of protecting the interests of the beneficiaries (investors/unitholders) is that of the Trustees. The first trustees are named in the Trust Deed, which also prescribes the procedure for a change in Trustees.
Ø To perform the trusteeship role, either individuals may be appointed as trustees or a Trustee company may be appointed. When individuals are appointed as trustees, they are jointly referred to as ‘Board of Trustees’. A trustee company functions through its Board of Directors.
Ø Day to day management of the schemes is handled by an Asset Management Company (AMC). The AMC is appointed by the sponsor or the Trustees.
Ø The trustees execute an investment management agreement with the AMC, setting out its responsibilities.
Ø Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related instruments, real estate assets & silver or silver related instruments) is with a Custodian, who is appointed by the Trustees.
Ø Investors invest in various schemes of the mutual fund. The record of investors and their unitholding may be maintained by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).
3.2-1
3.2 Key Constituents of a Mutual Fund
Sponsors
The application to SEBI for registration of a mutual fund is made by the sponsor(s). Thereafter, the sponsor invests in the capital of the AMC.
Since sponsors are the main people behind the mutual fund operation, few points regarding their eligibility criteria have been specified as follows:
Ø The sponsor should have a sound track record and general reputation of fairness and integrity in all business transactions. The requirements are:
u The sponsor should be carrying on business in financial services for not less than 5 years; and
u ensure that the net worth (share capital plus reserves minus accumulated losses) is positive in all the immediately preceding 5 years; and
Ø ensure that the positive liquid networth 18is more than the proposed capital contribution of the sponsor in the asset management company and ensure that in case of change in control of the existing asset management company due to acquisition of shares, the positive liquid net worth of the sponsor or funds tied up by the sponsor is to the extent of aggregate par value or market value of the shares proposed to be acquired, whichever is higher; and
u have net profit after providing for depreciation, interest and tax in each of the immediately preceding five years; and
u have average net annual profits after depreciation, interest and tax during the immediately preceding five years of at least rupees 10 crore.
Ø The sponsor should be a fit and proper person for this kind of operation.
18 Liquid networth” means the networth deployed in liquid assets which are unencumbered and shall include cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities and any other like instruments as specified by the Board from time to time.
LEGAL
Association of Mutual Funds in India’s (AMFI) website19 lists the names of all the Asset Management Companies, which are members of AMFI, in terms of the category of the sponsor, viz., Banks, Institutions, Private sector, etc. Within banks, there are predominantly Indian joint ventures, and others; and similarly, within the private sector, there are Indian, foreign, and predominantly Indian joint ventures.
3.2-2 Board of Trustees
The trustees have a critical role in ensuring that the mutual fund complies with all the regulations and protects the interests of the unitholders.
The SEBI Regulations stipulate that:
Ø Every trustee must be a person of ability, integrity and standing.
Ø A person who is guilty of moral turpitude cannot be appointed as a trustee.
Ø A person convicted of any economic offence or violation of any securities law cannot be appointed as trustee.
Ø No AMC and no director (including independent director), officer, an employee of an AMC shall be eligible to be appointed as a trustee of a mutual fund.
Ø No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as trustee of any other mutual fund.
Prior approval of SEBI needs to be taken before a person is appointed as Trustee.
The sponsor will have to appoint at least 4 trustees. If a trustee company has been appointed, then that company would need to have at least 4 directors on the Board. Further, at least two-thirds of the trustees on the Board of the trustee company would need to be independent trustees i.e., not associated with the sponsor in any way. SEBI expects Trustees to perform a key role in ensuring legal compliances and protecting the interest of investors. Accordingly, various General Due Diligence and Special Due Diligence responsibilities have been assigned to them. The rights and responsibilities include the following:
Ø The trustees shall enter into an Investment Management Agreement with the AMC that will define the functioning of the AMC in making and managing the mutual fund’s investments.
LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
Ø The trustees have the right to seek any information they require from the AMC to facilitate meeting their responsibilities as trustees.
Ø The trustees shall periodically review the service contracts relating to custody arrangements, and satisfy themselves that such contracts are executed in the interest of the unitholders. The trustees shall ensure that all transactions entered into by the AMC are in compliance with the regulations and the scheme.
Ø The trustees shall ensure that the interests of the unitholders are not compromised in any of the AMC’s dealings with brokers, other associates and even unitholders of other schemes.
Ø If the trustees believe that the conduct of the business of the mutual fund is contrary to the provisions of the regulations, then they must take corrective action and inform SEBI of the same.
Ø The trustees shall ensure that no change in the fundamental attributes of any scheme, the fees and expenses payable or any other change which would modify the scheme and affect the interest of the unitholders is carried out by the asset management company, unless it complies with the regulation. The trustees have to file details of their securities dealings with the mutual fund within the time and manner as may be specified by SEBI from time to time.
Ø On a quarterly basis the trustees shall review the transactions of the mutual fund with the AMC and its associates. They shall also review the net worth of the AMC on a quarterly basis to ensure compliance with the threshold provided in the mutual fund regulations.
Ø The trustees shall periodically review the investor complaints received and their redressal by the AMC.
Ø The trustees shall ensure that the trust property is properly protected, held and administered.
Ø The trustees shall obtain and consider the reports of the auditors and compliance officers in their periodic meetings and take action as required.
Ø The trustees shall file half-yearly reports to SEBI.
Ø Trustees shall exercise independent due diligence on certain “core responsibilities”, as specified by SEBI.
LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
The strict provisions go a long way in promoting the independence of the role of trusteeship in a mutual fund.
The trustees of mutual funds can now seek administrative assistance to monitor various activities of asset management companies.
3.2-3 Mutual Fund Trust
A mutual fund is constituted in the form of a trust and the instrument of trust is in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908), executed by the sponsor in favour of the trustees named in such an instrument.
3.2-4 Asset Management Company
Day to day operations of a mutual fund is handled by the AMC. The sponsor or, the trustees if so, authorized by the trust deed, shall appoint the AMC with the approval of SEBI.
As per SEBI regulations:
Ø The directors of the asset management company need to be persons having adequate professional experience in the finance and financial services related field.
Ø The directors as well as key personnel of the AMC should not have been found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws.
Ø Key personnel of the AMC should not have worked for any asset management company or mutual fund or any intermediary during the period when its registration was suspended or cancelled at any time by SEBI.
Prior approval of the trustees is required before a person is appointed as a director on the board of the AMC.
Further, at least 50 percent of the directors should be independent directors i.e., not associate of or associated with the sponsor or any of its subsidiaries or the trustees.
The asset management company need to have a networth of not less than rupees fifty crore deployed in assets as may be specified by the Board to be effective from January 01, 2024.
LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
The networth of the asset management company as required must be maintained on a continuous basis and it is the responsibility of the sponsor to ensure the same. A change in the control of the AMC directly or indirectly can be made only with the prior approval of the trustees and SEBI. A written communication about the change in the control of the AMC is sent to each unitholder (for those unitholders whose e-mail IDs are registered with the mutual funds, the communication can be sent through e-mail) and an advertisement is given in one English daily newspaper having nationwide circulation and, in a newspaper, published in the language of the region where the Head Office of the mutual fund is situated. The unitholders are given the option to exit on the prevailing Net Asset Value (NAV) without any exit load within a time period not less than 30 calendar days from the date of communication.
The AMC is responsible for conducting the activities of the mutual fund. It, therefore, arranges for the requisite offices and infrastructure, engages employees, provides for the requisite software, handles advertising and sales promotion, and interacts with regulators and various service providers.
The AMC has to take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of the SEBI regulations and the trust deed. Further, it has to exercise due diligence and care in all its investment decisions.
The appointment of an AMC can be terminated by a majority of the trustees, or by 75 percent of the Unitholders. However, any change in the AMC is subject to prior approval of SEBI and the Unitholders.
The AMCs desirous of launching Specialized Investment Fund (SIF), shall fulfil the additional requirements and meet the eligibility criteria as specified by SEBI.
3.2-5 Custodian
The custodian has custody of the assets of the fund. As part of this role, the custodian needs to accept and give delivery of securities for the purchase and sale transactions of the various schemes of the fund. Thus, the custodian settles all the transactions on behalf of the mutual fund schemes.
All custodians need to register with SEBI under the SEBI (Custodian) Regulations 1996. The Custodian is appointed by the trustees. A custodial agreement is entered into between the trustees and the custodian.
The SEBI regulations provide that if the sponsor or its associates control 50 percent or more of the voting rights of the share capital of the custodian, or if 50 percent or more of the directors of a custodian represent the interest of the sponsor or its associates, then, unless certain specific conditions are fulfilled, that custodian cannot be appointed for the mutual fund operation of the sponsor or its associate or subsidiary company.
An independent custodian ensures that the securities are indeed held in the scheme for the benefit of investors–an important control aspect.
The custodian also tracks corporate actions such as dividends, bonuses and rights in companies where the fund has invested.
3.3 Organization Structure of Asset Management Company
It is important to understand the various functions of an Asset Management Company (AMC) through the details of various departments within the firm (Chart 3.1).
CHART 3.1: ORGANISATION STRUCTURE OF ASSET MANAGEMENT COMPANY
Chart 3.1 is used for the explanation of various functions within an AMC. Individual AMCs may have some differences in the structure.
3.3-1 Compliance Function
Compliance Officer needs to ensure all the legal compliances. In the scheme documents of new issues, the Compliance Officer signs a due-diligence certificate to the effect that all regulations have been complied with, and that all the intermediaries mentioned in the scheme related documents have the requisite statutory registrations and approvals. To ensure independence, the Compliance Officer reports directly to the head of the AMC. The Compliance Officer works closely with the Trustees on various compliance and regulatory issues. It is the responsibility of the compliance officer to report any issue of non-compliance directly and immediately to the trustees.
3.3-2 Fund Management
Fund management is the most critical function in an Asset Management Company. It is at the core of the value proposition offered by the firm. The main function of this team is to invest the investors’ money in line with the stated objective of the scheme and to manage the same effectively.
Normally, the team can be broken into three sub-teams, viz., the analysts, the fund managers, and the dealers.
The analysts analyse various opportunities, be it individual securities, or sectors, or the state of the markets, or the economy. Some of them may analyse the stock markets, whereas some may analyse debt markets. Within debt markets, some may evaluate credit opportunities, whereas some may analyse the interest rate movements. Their job is to identify investment opportunities.
The fund managers evaluate the opportunities presented to them by the analysts, the brokers, and other research firms. They may also identify opportunities by themselves. The performance of the scheme is the fund manager’s responsibility.
The third sub-team is that of the dealers, whose responsibility is to place orders with securities brokers based on the instructions of the fund managers.
3.3-3 Operations and customer services team
When a customer visits a branch office of an AMC, s/he is attended to by the customer services team. Such a team is also called the front office team. Apart from this front office team, there is also a team in the back office to help investors by
resolving various queries. Both these together are part of the Customer Services Team. Many AMCs have adopted information technology solutions and have set up call centers and chat bots to answer customer queries and resolve service issues. The Registrar and Transfer Agency (RTA), which is a big part of this unit, maintains investor records as well as allots or redeems units, processes purchase/redemption/ switch requests, dividends, etc. It also generates the account statement that an investor receives.
There is a Custody Team within this group that interacts with the custodian for the purpose of settlement of various transactions that the fund management team initiates.
The Fund accounting team maintains books of account of each individual mutual fund scheme and calculates NAV on a daily basis.
Under SEBI’s Risk Management Framework (RMF), risk management is an independent and specialized function within every Asset Management Company (AMC). The framework requires AMCs to strengthen accountability by designating dedicated risk officers for key areas of exposure—namely, investment risk, compliance risk, operational risk, and cyber security.
3.3-4 Sales and Marketing Team
This team reaches out to the investors through mass media, marketing campaigns and through a distribution channel. Their major responsibilities include branding, advertising, management of various events, and distribution of mutual fund products through various distribution channels. Mostly, it is this team that would interact with the mutual fund distributors, and take care of relationship management and engagement. This team also helps in the growth of the distribution network through various interactions and training programs.
3.3-5 Other Functions
These functions are largely supported functions to run the AMC operations smoothly. These include Finance/Accounts, Administration, Human Resources and Development (HRD), Information Technology. They perform various tasks that ensure smooth functioning of the AMC, as well as improve customer experiences.
Ø The Accounts team handles the finances of the AMC. This unit is different from the fund accounting team.
Ø There is an Administration Department that takes care of various facilities, offices, and other infrastructure. In many AMCs, the administration reports to the finance function.
Ø The HRD department is responsible for attracting, nurturing and retaining talent within the firm. They take care of the learning and development requirements of the personnel.
Ø The Information Technology department also referred as the Technology team, takes care of the IT infrastructure required by various functions and departments. This may also include the AMC website, as well as many facilities offered to investors and distributors with the help of technology.
3.4 Role and Support function of Service Providers
3.4-1 Fund Accountant
The fund accountant performs the role of calculating the NAV, by collecting information about the assets and liabilities of each scheme. The AMC can either handle this activity in-house or engage a service provider. There is no need for registration with SEBI to perform this function.
3.4-2 Registrars and Transfer Agents
The Registrars and Transfer Agents (RTAs) maintain investor records. Their offices in various centers serve as Investor Service Centers (ISCs), which perform a useful role in handling the documentation of investors. The functions of the RTA include processing of purchase and redemption transactions of the investor and dealing with the financial transactions of receiving funds for purchases and making payments for redemptions, updating the unit capital of the scheme to reflect these transactions, updating the information in the individual records of the investor, called folios, keeping the investor updated about the status of their investment account and information related to the investment.
MUTUAL FUND DISTRIBUTORS
AUTHOR : National Institute of Securities Markets (NISM) | An Educational Initiative of SEBI
PUBLISHER : Taxmann
DATE OF PUBLICATION : December 2025
EDITION : Workbook Version - November 2025
ISBN NO : 9789371262743
NO. OF PAGES : 388
BINDING TYPE : Paperback
Rs. 585
DESCRIPTION
Mutual Fund Distributors is a comprehensive, regulator-approved study manual prescribed for the NISM-Series-V-A: Mutual Fund Distributors Certification Examination, mandated by SEBI for individuals and entities engaged in the sale and distribution of mutual fund products in India. This Workbook functions as a structured competency-building resource that establishes a uniform minimum knowledge benchmark for mutual fund distributors across the Indian securities market. It integrates investment fundamentals, mutual fund products, legal and regulatory frameworks, distributor practices, investor servicing standards, and ethical conduct, positioning mutual fund distribution as a professional, regulated, and investor-centric function rather than a mere sales activity. The Workbook reflects NISM's pedagogy by balancing conceptual clarity, regulatory compliance, and applied market practice, serving both as an exam-oriented preparation tool and a practical reference guide for ongoing professional use.
This book is intended for the following audience:
• Individual Mutual Fund Distributors
• Employees of Mutual Fund Distribution Firms & AMCs
• Banking, Wealth Management & Financial Advisory Professionals
• Aspiring Finance Professionals & Students
The Present Publication is the November 2025 Workbook Version, developed in collaboration with the NISM Certification Team and Mr Sundar Sankaran, Ms Sunita Abraham & Mr Amit Trivedi. It is published exclusively by Taxmann, with the following noteworthy features:
• [SEBI-mandated & Officially Prescribed Material] The principal reference source on which the certification examination is primarily based
• [End-to-end Coverage of Mutual Fund Distribution] Covers the complete distributor lifecycle, from investor profiling and product selection to post-sale servicing and compliance
• [Regulatory & Institutional Depth] Detailed exposition of SEBI's role, AMFI's functions, and the statutory framework governing mutual funds
• [Strong Investor-protection Orientation] Emphasises suitability, disclosures, grievance redressal, and ethical distributor conduct
• [Certification-ready Structure] Closely aligned with the NISM syllabus outline and examination objectives