What happens to your mutual fund units if an AMC shuts down? Franklin Templeton and Morgan Stanley cases offer answers

For mutual fund investors, an asset management company (AMC) shutting down can raise concerns about the safety and accessibility of their investments. Since the AMC manages the schemes, its insolvency, exit or inability to continue operations may leave investors unsure about what happens to their units. However, an AMC’s closure does not mean investors lose ownership of the underlying assets.

That is because the AMC and the mutual fund scheme are legally and structurally separate. Mutual funds are set up as trusts, with the scheme’s assets held for the benefit of unit holders, while the AMC’s role is to manage those investments. The securities are also held separately through a SEBI-registered custodian and do not form part of the AMC’s own balance sheet.

Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth Limited, said that if an AMC is unable to manage a scheme, it can either be transferred to another AMC or wound up, depending on the circumstances. If another fund house takes over, investors can continue to hold their units under the new AMC; if the scheme is wound up, its assets are liquidated and the proceeds are returned to investors.

Investors’ mutual fund units do not disappear if an AMC shuts down, Rajani said. The AMC manages the fund but does not own the underlying investments.

“So any equity, bonds or other securities held by the scheme continue to belong to the unit holders,” she said.

If the AMC can no longer manage the scheme, it can either be transferred to another AMC or the scheme can be closed down, depending on the circumstances. If another AMC takes over, it assumes responsibility for managing the investments. Investors continue to hold their units under the new fund house.

If the scheme is closed down, the assets are liquidated and the proceeds are returned to investors.

Rajani cited the example of Franklin Templeton India, which shut six debt schemes in 2020. The underlying assets remained with the schemes, and more than ₹ 25,000 crore was eventually returned to investors.

This separation between the AMC and the scheme is important because an AMC’s financial difficulties do not directly mean that the scheme’s underlying investments are at risk.

The structure of a mutual fund provides a layer of separation between the fund house and investors’ assets.

“Every mutual fund is structured as a trust, where the trustees hold the assets on behalf of the unit holders, while the AMC is only responsible for managing those investments,” Rajani said.

The securities are held separately by a SEBI-registered custodian and do not sit on the AMC’s own balance sheet. Therefore, if an AMC runs into financial difficulties, its creditors cannot claim the mutual fund’s investments because those assets belong to the scheme and are held for the benefit of unit holders.

The sponsor, trustees, AMC and custodian also have separate responsibilities within the mutual fund structure, creating different layers of oversight and protection for investors .

If an AMC is no longer able to manage a scheme, the trustees assess the situation and can seek SEBI’s approval to transfer the scheme to another AMC or wind it up.