How Does Money Flow in a Mutual Fund & Is It Safe?
Many investors put money into mutual funds but don’t fully understand where the money actually goes and who keeps it. This article explains the complete mutual fund money flow in simple, non-technical words.
Big Picture – In One Line
Who Are the Key Players?
| Entity | Role |
|---|---|
| You (Investor) | Invest money & own mutual fund units |
| AMC (Asset Management Company) | Manages & invests money (does NOT own it) |
| Trustees | Protect investors & monitor AMC |
| Custodian Bank | Safely holds money & investments |
| RTA (Registrar) | Keeps records of your units & folios |
| Market Regulator | Frames rules & audits everyone |
Step-by-Step: How Your Money Flows
Step 1: You Invest
You invest via AMC website, app, or advisor. Your money goes into the official mutual fund bank account, not to any individual.
Step 2: AMC Gets Permission (Not Ownership)
The AMC only gets the right to manage your money. It cannot use the money for its own business.
Step 3: Custodian Holds the Money Safely
An independent custodian bank holds:
- Cash of the mutual fund
- Shares, bonds & securities (in demat form)
Step 4: Fund Manager Invests
The fund manager decides what to buy or sell. The custodian executes the transaction and holds the assets safely.
Step 5: Units Are Allotted to You
Based on the day’s NAV:
- You receive mutual fund units
- Your name & units are recorded by the RTA
Where Is Your Money Actually Kept?
- Cash → With custodian bank
- Investments → In demat accounts held by custodian
Even if the AMC shuts down, your investments remain untouched.
What If the AMC Goes Bankrupt?
| Scenario | Impact on Investor |
|---|---|
| AMC shuts down | Your money is safe |
| Custodian exists | Assets remain protected |
| New AMC appointed | Fund continues normally |
Why Mutual Funds Are Considered Safe
- Multiple independent entities involved
- Strict regulations & audits
- No single person controls your money
- Clear separation of roles
Simple Analogy to Remember
- You own the locker
- AMC manages the locker
- Custodian holds the keys
- Regulator watches everyone
Final Takeaway
✔ Your assets are ring-fenced
✔ Mutual funds are among the most regulated investments in India
Understanding this flow builds confidence — and confident investors make better decisions.