📚 PASS Investment Adviser (Level 2) Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 13.10 — Taxation in case of winding up of Mutual Funds

Imagine you are an investment research analyst reviewing the risk disclosure documents of a mutual fund scheme. While reading the scheme information document, you notice that the winding-up clause isn’t limited to a vote by unitholders. You recall that during a period of extreme market volatility, a specific debt-oriented scheme was liquidated not because of a formal poll, but due to a unilateral decision by the board of trustees. This highlights a critical, often overlooked reality: the fiduciary authority of trustees extends beyond merely executing the will of the investors.

In the Indian financial context, SEBI regulations empower the trustees to initiate the winding up of a scheme if they arrive at a professional opinion that the scheme’s continued existence is no longer sustainable or in the best interest of the unit holders. This is not a choice made lightly; it is a profound exercise of fiduciary duty.

If the underlying assets face a liquidity crisis, or if the investment mandate can no longer be fulfilled due to systemic market failures, the trustees act as the ultimate safeguard for capital preservation. They do not need to wait for a 75% majority vote if they determine that the scheme has reached a point of ’economic redundancy’ or insolvency.

For a researcher or portfolio manager, this power serves as a vital risk-mitigation feature. If a scheme’s portfolio quality deteriorates significantly, the trustees’ ability to step in and freeze redemptions to prevent a ‘run on the fund’ actually protects the remaining investors from being forced into fire-sale losses. Consider a scenario where a mid-cap fund’s liquidity dries up completely due to a market crash.

If the trustees decide to wind up the fund, they initiate an orderly liquidation process, ensuring that the proceeds are distributed fairly rather than allowing the fund to be drained by the first few investors who manage to exit at inflated, stale NAVs.

Ultimately, understanding this power changes how you evaluate risk in your model. When analyzing a fund, don’t just look for its performance metrics; look for the composition and experience of the Board of Trustees. Their mandate is to be the sentinel of the scheme. When they exercise their power to wind up a fund, they are effectively choosing a controlled dissolution over a chaotic collapse, which is fundamentally a proactive risk management decision that preserves the remaining terminal value for the unit holders.1

Nuance

⚠️ Nuance
Many candidates incorrectly assume that the ‘75% unitholder vote’ is the only path to winding up a scheme. This is a common trap; the regulation provides multiple distinct triggers, and the trustees’ opinion is an independent, legally sufficient trigger. A professional must understand that trustees operate under a primary duty to the investors, which occasionally requires them to act even against the immediate preference of a fraction of the investor base.

Check Your Understanding

Practice Question 1

An AMC notices a major shift in the asset class risk profile due to sudden regulatory changes. The Trustees believe the scheme is no longer viable, yet the majority of unitholders wish to continue. What is the legal standing regarding winding up?

Practice Question 2

Which of the following is a primary condition under which a mutual fund scheme can be wound up?

This is a companion read for Section 13.10 — Taxation in case of winding up of Mutual Funds from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. Terminal value refers to the final distribution proceeds an investor receives upon the total liquidation of the scheme’s asset base. ↩︎