Can your mutual fund run away with your money?

Summary: Many first-time investors share the same fear: what if a mutual fund simply disappears with my money? Could that ever happen in India? The answer is in the fine print of how mutual funds are built and regulated. We break them down in the story below.

Many first-time investors worry about whether a mutual fund can disappear with their hard-earned money, a fear that is understandable since scams and defaults aren’t unheard of in India’s financial markets.

But the good news is that this simply cannot happen. And the reason lies in the way mutual funds are structured in India. They aren’t run by a single company that takes your money and invests it. Rather, they are built on a layered structure, with different safeguards and watchdogs.

Let’s unpack how this structure works to protect you.

The sponsor: the promoter of the fund

A sponsor is an entity that sets up the mutual fund by providing initial capital, much like a promoter does for a company. Since mutual funds are set up as a trust, the sponsor’s job (after securing SEBI approval to set up the fund structure) is to establish the mutual fund trust and appoint the board of trustees in compliance with SEBI regulations.

The Trust and its trustees: the core safeguard

This is the primary watchdog, which is separate from the asset management company (AMC) or the mutual fund house. Every mutual fund is set up as a Trust, meaning it is legally bound to act only in the interests of unitholders.

The Trust, not the AMC, owns the fund’s assets on behalf of investors.

The trustees oversee the trust and their role is to monitor the AMC’s operations, make sure it plays by SEBI’s rules and step in if it doesn’t.

Trustees also hold the authority to replace the AMC in case of malpractice. At least two-thirds of the board of trustees must be independent and not associated with the sponsor.

This independence, plus their legal duty to act only in the interest of investors, makes trustees the strongest line of protection in the mutual fund structure.

The AMC: manager, not owner

The AMC is the visible face of a mutual fund and acts as the investment manager of the trust, deciding what stocks, bonds or other assets to buy and sell. For this, the AMC charges a small fee.

Crucially, the AMC does not own the money. It only manages it on behalf of the trust, under the trustees’ supervision and SEBI’s strict regulations. Even if the AMC collapses or exits the business, the assets remain intact with the trust and trustees can appoint another AMC to take over.

At least half of the AMC’s board of directors are also required to be independent from the sponsor or the trustees.

Custodians and registrars: The vault and the ledger

What about the actual shares and bonds that your mutual fund buys? They are held by independent custodians, which are SEBI-registered entities like Central Depository Services (CDSL) and National Securities Depository (NDSL).

Meanwhile, the record of your holdings—how many units you own, in which scheme and linked to which bank account—is maintained by registrar and transfer agents (RTAs) such as CAMS or KFinTech. This ensures that even if an AMC or a distributor platform collapses, your units remain safe and verifiable in the independent ledger.

SEBI’s role: the rule-setter and enforcer

Over all these layers sits SEBI, the markets regulator. It lays down strict rules on how mutual funds operate—from who can be a sponsor, who can act as a trustee to how portfolios must be disclosed and redemptions processed.

To sum up

Mutual funds in India are not one-man shows that can shut shop and disappear with your money. They are carefully designed trusts, with independent trustees, separate custodians and registrars, all under SEBI scrutiny. The AMC may manage your money but it can never own or run away with it.

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This article was originally published on September 10, 2025.