What is a Mutual Fund Custodian?
- 15th September 2025
- 09:00:00 AM
- 6 min read
As a mutual fund investor, have you ever wondered who keeps your mutual fund investments safe and streamlined? A mutual fund custodian ensures the safety and smooth operation of funds by timely settlements, fraud prevention, and accurate record-keeping for investors.
With mutual fund folios crossing 24.57 crore as of the current financial year, the need for reliable custodians is increasing.
Read this blog to learn the meaning of such custodians, their responsibilities and importance in the mutual fund realm.
What Does a Mutual Fund Custodian Mean?
If you are a mutual fund investor, you must have heard about a custodian service in the mutual fund realm. It is a separate entity that safeguards the underlying assets such as stocks, bonds and other securities of a mutual fund in which you are invested.
To understand the concept of a mutual fund custodian better, let us break it down for a simplified view:
- The Investment Company Act of 1940 mandates that mutual fund houses and custodians must register with the Securities and Exchange Commission.
- The mutual fund custodian acts as an intermediary between the investors and the fund houses.
- Such custodians are usually the banks or any other eligible financial institutions. The board of trustees of a mutual fund appoints such an institution as a custodian.
- Aside from safeguarding the securities of your invested mutual fund, they calculate NAV, maintain compliance with regulations, ensure proper and secure transactions, and more.
- As of 2025, there are 17 custodians for mutual funds in the Indian market who safeguard your mutual fund assets.
Role of Custodian in Mutual Fund
Now that you know the custodian meaning in mutual funds, let us delve deeper into their specific roles that contribute to keeping a fund up and running:
- Custodians maintain detailed records of all transactions and holdings. For example, if you invest in mutual funds, hold 1,000 units and add 200, they update it to 1,200.
- A mutual fund custodian is responsible for taking care of the interest payouts and dividend payments. Suppose your fund earns 23.15% annually, and the custodian credits your share based on your unit holding.
- A fund custodian is also responsible for managing corporate actions. They include stock splits, mergers and dividends and ensure processing them accurately.
- In India, trade settlements follow T+2, where payments and securities are exchanged within 2 business days. A custodian ensures a smooth trade settlement process.
- Suppose the current Net Asset Value NAV of a fund stands at INR 261, which represents the per unit price of the fund. A custodian determines this amount after each trading day by balancing and reconciling assets and liabilities of the fund.
- A custodian is responsible for monitoring the investment limitations. They regularly communicate with the Securities and Exchange Commission (SEC) for compliance.
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Significance of Mutual Fund Custodian
During the previous financial year, the mutual fund sector in India managed over INR 58,91,160 in Asset Under Management or AUM. This large amount clearly shows the significance of fund custodians that safeguard the assets and maintain investor trust:
- You can think of a custodian as a locker at a bank where you deposit expensive items like a gold safe. Similarly, a fund custodian keeps the underlying assets of your fund and brings you peace of mind.
- Tracking investor entries and exits keeps the fund’s cash flow balanced and unit counts accurate. The mutual fund custodian handles this to ensure smooth operations.
- As of FY25, investors in India lodged 62,687 complaints regarding fake investment schemes. Sticking to proper regulations, custodians prevent such frauds.
- The Long Term Capital Gain or LTCG tax on equity-oriented funds is 12.5% if the total gain exceeds INR 1.25 lakh. As an additional service, a fund custodian assists with such tax calculations, which benefits investors.
- As a custodian takes care of administrative tasks, with security and other concerns, it helps the fund managers concentrate on making the right investment decisions.
Conclusion
When you choose and invest in a mutual fund in India, the board of trustees appoint a mutual fund custodian. Their main role is to ensure the safety or security of the underlying assets associated with a fund. They perform administrative tasks, updating the NAV of the funds and more. They closely follow the regulatory norms to keep fraud at bay.
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Frequently Asked Questions
1. What factors should be considered when choosing a mutual fund custodian?
As an investor, you cannot directly choose a fund custodian for your investment. However, a mutual fund house looks out for several factors such as reputation, financial stability, and compliance record. They consider the fee structure along with cybersecurity features.
2. How do mutual fund custodians ensure the security of investments?
To ensure the security of your mutual fund investments, a fund custodian prevents the mishandling of funds. They also ensure the elimination of the risks of fraud to maintain investor trust. They keep an accurate record of transactions and settle trades on time.
3. Can a mutual fund change its custodian?
Yes, a mutual fund house might change its custodian, but such a process is not very common due to its complexity. However, in cases of significant issues or for a better alternative, fund houses can change their custodians. It involves permission from trustees and even regulators and involves the transfer of all records and assets, which is cumbersome.
4. How does the mutual fund custodian impact investment returns?
Custodians provide their services for securing assets of a fund based on the AUM. However, some custodians also might charge based on transactions or annually. This charge ultimately impacts the overall expense ratio of a fund and is deducted from the investment value.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
