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nism-series-va-mutual-fund-trust-structure-pass-through[ MUTUAL FUND DISTRIBUTORS ]

Under Indian regulatory frameworks, how is a mutual fund constituted, and how are portfolio gains or losses distributed among stakeholders?

[ A ]It is established as a Public Limited Company where profits are retained as corporate reserves by the AMC.
[ B ]It operates as a Partnership where the Sponsor guarantees a fixed 10% annual return to investors.
[ C ]It is established as a Trust where all profits and losses belong exclusively to unitholders on a pass-through basis.[ CORRECT ]
[ D ]It functions as a Non-Banking Financial Company where the Trustees absorb all capital losses during market downturns.
Takeaway

Option C is correct: It is established as a Trust where all profits and losses belong exclusively to unitholders on a pass-through basis.

Derivation
Under the SEBI (Mutual Funds) Regulations, 2026, a mutual fund is constituted as a Trust under the Indian Trusts Act, 1882. It operates strictly as a pass-through vehicle where all investment gains, dividends, interest, and capital losses belong entirely to the scheme unitholders in proportion to their unit holdings. No other constituent participates in profits. This question tests the structural legal identity of mutual funds. A common pitfall is confusing an AMC with a corporate entity retaining investment profits.
Why the others fail
A — It is established as a Public Limited Company where profits are retained as corporate reserves by the AMC.
The AMC is the management company, but the mutual fund itself is a Trust and does not retain investment profits as corporate reserves.
B — It operates as a Partnership where the Sponsor guarantees a fixed 10% annual return to investors.
Mutual funds are not partnerships and regulations strictly prohibit Sponsors from guaranteeing returns unless explicitly structured with a guarantor.
D — It functions as a Non-Banking Financial Company where the Trustees absorb all capital losses during market downturns.
Trustees provide fiduciary oversight and do not act as financial guarantors absorbing market-driven capital losses.