For a used as the current drawing, the metadata is stored inside the DWG. Because the DWG file stores the location of the data source, the metadata will be with each data update, or each time it connects to updated data.
When you export metadata from a current classified DWG, it is transferred to an MTD file. Although the file has an .mtd extension, its format is XML. A linking file is also created and placed in the same location as the MTD file. If the following conditions are met, the linking file retains the location of the data, and the exported metadata are kept current.
When you export metadata for a feature class, a feature source definition (FSD) file is created in addition to the MTD. In this case, it is the FSD file that keeps the metadata linked to its source data.