Role of Custodian, RTA & Auditor

India follows the trust route (similar to the UK model) because a trust is a fiduciary arrangement where the trustee is legally bound to act in the best interest of beneficiaries (unitholders). In a company structure (used in the US), shareholders' interests could conflict with investors' interests. The trust structure provides an additional layer of protection — the trustee's sole purpose is to safeguard investor money, and they are personally liable for any breach of fiduciary duty.

Absolutely not. SEBI mandates that these three entities must be legally separate. The Sponsor cannot be the Trustee. The AMC is a separate company from the Trustee. While the Sponsor typically holds equity in the AMC, the Trustee must have independent directors (at least 2/3rd) to prevent conflicts of interest. This separation is the cornerstone of investor protection in the mutual fund structure.

Investor money remains safe because it is held in the mutual fund trust, not on the AMC's books. If an AMC shuts down, SEBI would either transfer the management of the schemes to another AMC or wind up the schemes and return money to investors at prevailing NAV. This has happened in practice — when Pioneer ITI MF was taken over by Franklin Templeton, and when Sahara MF's schemes were transferred, investor money was protected throughout.

The trust structure is common in countries following the UK model (India, UK, Australia). The US uses a corporate structure where the mutual fund is a company and investors are shareholders. The European model uses a contractual structure. Each has pros and cons, but India's trust model with SEBI regulation is considered one of the more investor-protective frameworks globally.

NISM loves testing the relationships between the three entities. Common questions include: who appoints whom, what are the eligibility criteria for the Sponsor, how many trustees must be independent, what is the minimum net worth for an AMC, and what happens if the AMC violates regulations. Memorize the flow: Sponsor establishes Trust → appoints Trustee → Trustee appoints AMC (with SEBI approval). Also remember the key numbers: 40% minimum sponsor contribution, 2/3rd independent trustees, ₹50 crore AMC net worth.

No. A Sponsor must be a body corporate (company, bank, or financial institution). An individual cannot be a Sponsor of a mutual fund. The Sponsor entity must have the financial track record, net worth, and regulatory credibility that SEBI demands. For example, HDFC Ltd, SBI, ICICI Bank, Aditya Birla Group — all are established corporate entities.

An independent trustee is one who is not associated with the Sponsor in any capacity — not an employee, director, or shareholder of the Sponsor or its group companies. SEBI requires at least 2/3rd of trustees to be independent. This ensures that trustee decisions are not influenced by the Sponsor's business interests and remain aligned with unitholder protection.

A change in Sponsor (or a significant change in Sponsor shareholding) requires prior SEBI approval. The new Sponsor must meet all eligibility criteria — 5 years of financial services experience, positive net worth, and 40% contribution. This is what happens during major AMC acquisitions. For example, when Nippon Life increased its stake in Reliance Nippon AMC (now Nippon India MF), SEBI approval was required at multiple stages.