Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Mechanics & Ways of Investing in Mutual Funds – KYC, KYD and Investor Empowerment

Having understood various aspects of mutual funds, let us now consider the mechanics of investing in mutual fund schemes.

Mechanics & Ways of Investing in Mutual Funds
[Mechanics & Ways of Investing in Mutual Funds]

1.   Who Can Invest in Mutual Fund Schemes?

The following categories of investors are eligible to invest in Indian mutual funds:

>>        Resident Indian adult individuals, either singly or jointly (not exceeding three);

>>        Parents and lawful guardians on behalf of minors;

>>        Companies, corporate bodies registered in India;

>>        Registered societies and co-operative societies authorized to invest in such units;

>>      Religious and charitable trusts under the provisions of 11(5) of the Income Tax Act, 1961 read with Rule 17C of the Income Tax Rules, 1962;

>>        Wakf Boards and Endowments and Trustees of private trusts authorized to invest in mutual fund schemes under their trust deeds;

>>        Partners of partnership firms;

>>        Association of persons or body of individuals, whether incorporated or not;

>>        Hindu Undivided Families (HUFs), in the sole name of the Karta;

>>        Banks, financial institutions and investment institutions;

>>        Non-resident Indians I persons of Indian origin resident abroad (NRIs / PIOs) on full repatriation or non-repatriation basis;

>>        Other mutual funds registered with SEBI;

>>        Foreign institutional investors (FIls) registered with SEBI;

>>        International multilateral agencies approved by the Government of India;

>>        Army I Navy / Air Force, para-military units and other eligible institutions;

>>        Scientific and industrial research organisations; and

>>        Provident funds, superannuation funds, gratuity funds, NPS funds, as well as regional rural banks and co-operative banks are permitted to invest in specific mutual fund schemes. They need to confirm the eligibility with the offer documents of the scheme concerned.

>>        Qualified Foreign Investors fulfilling KYC requirements (See para 15.2).

>>        Foreign Portfolio Investors registered under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (see para 15.3).

2.   Investment by Qualified Foreign Investors (QFIs)

Earlier, foreign nationals who wished to have an exposure to Indian mutual funds had to route their investment through an FII.QFIs, who meet Know-Your- Customer requirements are now permitted to invest directly in debt and equity mutual fund schemes in India. Two routes are available for them:

>>        Direct route, i.e. they hold their units in a demat account through a SEBI registered Depository Participant.

>>        Indirect route, i.e. they hold Unit Confirmation Receipt (UCR). The mutual fund will appoint one or more UCR issuing agents overseas and one SEBI registered custodian in India. The agents overseas will issue UCR against the demat units held by the custodian in India.

SIP / SWP / STP facility is not permitted for QFIs. Their unit-holdings are non-tradeable and non-transferable. However, they can sell the units back to the scheme and repatriate the proceeds. Withholding tax at the applicable rates will be collected by the scheme and only the balance will be paid to the QFI.

QFIs are expected to migrate to the FPI regime in due course.

3.   Investment by Foreign Portfolio Investors (FPIs)

The FPI regulations envisage three categories of foreign investors:

>>        “Category I foreign portfolio investor” which includes Government and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.

>>        “Category II foreign portfolio investor” which includes:

(i)      appropriately regulated broad based funds such as mutual funds, investment trusts, insurance/reinsurance companies;

‘Broad-based fund means a fund, established or Incorporated outside India, which has at least twenty Investors, with no investor holding more than forty-nine per cent of the shares or units of the fund. Further, if the broad-based fund has an institutional investor who holds more than forty nine per cent of the shares or units in the fund, then such institutional investor must itself be a broad based fund.

For ascertaining the number of investors in a fund, direct investors as well as underlying investors are considered.

(ii).         appropriately regulated persons such as banks, asset management companies, investment managers? advisors, portfolio managers;

(iii).   broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated:

The Investment manager of such broad-based fund has to be registered as Category II foreign portfolio Investor, and needs to undertake that it shall be responsible and liable for all acts of commission and omission of all its underlying broad-based funds and other deeds and things done by such broad-based funds under these regulations.

(iv).         university funds and pension funds; and

(v).    university related endowments already registered with SEBI as foreign institutional investors or sub-accounts,

>>        “Category III foreign portfolio investor” which includes all others not eligible under Category I and II foreign portfolio investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Resident Indians, Non-Resident Indians (NRI) and Overseas Citizens of India (OCI) cannot be beneficial owners of FPIs.

4.   Who cannot Invest in Mutual Fund Schemes?

The following are not permitted to invest in Indian mutual funds:

>>        Persons residing in countries which require licensing or registration of Indian mutual fund products before selling the same in its jurisdiction, if the fund has not obtained such license or registration.

>>        Persons residing in any Financial Action Task Force (FAT9 declared non- compliant country or territory.

>>        Overseas Corporate Bodies as specified by RBI in its A.P. (DIR Series) Circular No. 14 dated September 16, 2003.

5.   Minimum Number of Investors

Every new scheme, and individual plan(s) under any scheme, needs to fulfil both of the following conditions:

>>        Have a minimum of 20 investors; and

>>        No single investor should account for more than 25% of the corpus of such scheme I plan(s).

New open-end schemes can fulfil the above requirements within three months or the end of the succeeding calendar quarter, whichever is earlier, from the close of the new fund offer (NFO), failing which the scheme would have to be compulsorily wound up.

In each subsequent calendar quarter thereafter, the schemes (plans) should fulfil both the above conditions on an average basis.

The average is to be calculated at the end of each quarter on the basis of the number of investors as at the end of business hours of the scheme on a daily basis.

If, a scheme has to be compulsorily wound up on account of a failure to fulfil these conditions, redemption has to be made within 10 days of winding up.

Exceptions

>        The three-month balancing period is not applicable to fixed maturity plans and closed end schemes. Such schemes, therefore, need to comply with both requirements at the very time of allotment.

>        The guideline regarding the number of investors is not applicable to exchange traded funds.

6.   Know Your Customer (KYC)

KYC formalities are required to be completed by all investors, including guardians and power of attorney holders, for any investment in mutual funds, irrespective of the amount.

Without KYC, transactions such as new! additional purchase, switch transactions, new SIP / STP/ Dividend Transfer Plan (DTP) registrations cannot be carried out. However, KYC is not applicable for redemption/ re-purchase.

SEBI has made it convenient for investors, by making a single KYC applicable across the capital markets; i.e. mutual funds, brokers, registrars & depositories. Therefore, an investor who has completed her KYC through one capital market intermediary (including mutual fund distributor who has complied with all Know- Your-Distributor requirements) can use that KYC for transactions through other capital market intermediaries.

The five KRAs currently registered with SEBI are:

>>      NSDL Database Management Ltd (NDML), a subsidiary of National Securities Depository Ltd;

>>        CDSL Ventures Ltd (CVL), a division of Central Depository Services (India) Ltd;

>>        DotEx International Ltd, a unit of the National Stock Exchange of India Ltd (NSE);

>>        Karvy Data Management Services Ltd; and

>>        CAMS Investor Services Private Ltd.

The process includes submission of application form along with documents to a capital market intermediary. The form can be downloaded from the website of any of the KRAs. In Person Verification of the investor by the capital market intermediary is mandatory.

The following are the typical documentation requirements for investors who are individuals:

>>        Proof of Identity

>>        Proof of Address

>>        PAN Card

PAN Card is compulsory for all investors except:

–        Micro-SIPs, i.e. SIPs where annual investment (on 12 month rolling basis or for April-March financial year) does not exceed Rs. 50,000

–        Small investors investing in cash, up to Rs. 50,000 per mutual fund per financial year.

>>        Photograph.

In the case of non-individual investors (e.g. companies or trusts) the following additional documents are required:

>>        Memorandum of Association and Articles of Association, or Trust Deed to demonstrate the non-individual investor’s eligibility to invest.

>>        Board Resolution authorising the non-individual investor to invest, and authorisation to officials to sign the requisite forms on behalf of the investor.

The originals of these documents along with a copy each have to be presented to the capital market intermediary and the original will be returned after verification. Alternatively, investors can also provide an attested true copy of the relevant documents. Attestation could be done by a notary public / gazette officer! manager of a scheduled commercial bank. The intermediary will upload the details of the investor to the server of a KRA.

Any subsequent changes in address or other details needs to be intimated only once to an intermediary with the relevant documentary proof. On completion of the process, the change will reflect in the records of all KRAs.

It is also mandatory for investors to mention their bank account numbers in their applications / request for redemption.

The government had issued a notification under the Prevention of Money Laundering Act, 2002 making it mandatory for every mutual fund folio to be linked to Aadhaar. However, the Supreme Court, through its ruling on 13 March 2018, has held this in abeyance. So, Aadhaar linking is not mandatory as of the date on which this text is being finalised. Investors can, however, choose to do the Aadhaar linking voluntarily. This can be conveniently done through e-verification facility offered by the RTAs. The unit-holder has to enter her e-mail ID, PAN, Aadhaar number and registered mobile number in the relevant screen in the RTA website.

All the AMCs for which the RTA has been appointed, and where the unit holder has a folio will be shown on screen, based on PAN and e-mail ID. The unit holder can select one or more or all the AMCs that are listed. On submitting, the unit holder will receive an OTP on her mobile number that is registered with Aadhaar. This OW is to be entered on the screen displayed by the RTA website. Once the authentication is done, the unit holder will receive a confirmatory message on her mobile number.

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Investor will need to repeat the process with other RTAs, if the first RTA does not service all the mutual funds where the unit holder has a folio. In the case of Sundaram BNP Paribas Mutual Fund and Franklin Templeton Mutual fund, unit holder needs to do the linking directly with the AMC.

7.   Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP)

The benefits of spreading one’s exposure — namely, diversification across asset classes, sectors, countries, etc. — in any investment activity are well chronicled. What is increasingly recognised is the benefit arising out of spreading the timing of one’s actions.

Rather than investing, disinvesting or switching the entire portfolio at a single point of time, it is prudent to spread these actions systematically over a period of time. This also curbs the investor’s tendency to time the market, an investment style that several researchers have statistically proved as having a poor chance of success.

This principle of time diversification has given rise to the concepts of:

>          Systematic Investment Plan (SIP);

>          Systematic Withdrawal Plan (SWP); and

>          Systematic Transfer Plan (STP).

(1)   Systematic Investment Plan (SIP)

SIP refers to the practice of investing a constant amount regularly, generally every month. When the market goes up, then the money invested in that period gets translated into a fewer number of units for the investor. If the market goes down, then the same money invested gets translated into more units.

Given Table have illustrations of SIP in three market scenarios, when the investor invests Rs.1,000 per month over a 12-month period. The results are summarised in Table.

Systematic Investment Plan (SIP)-1
[Systematic Investment Plan (SIP)]
Thus, it is clear that:

>        When the market gained 11.6% during the year, the gain for the investor was only 5.4%. On the other hand, when the market fell 10.5% during the year, the investor’s loss was only 5.6%. SIP, therefore, tempers the gain or loss from investment.

>        SIP does not offer protection from losses. If the market turns adverse, then you can lose money even in an SIP.

>        SIP ensures that your acquisition cost approximates the average NAy. Therefore, this investment style is also called “rupee cost averaging”.

Investors can do their SIP transactions either by issuing post-dated cheques or giving appropriate standing instructions to the bank.

Value averaging is another approach to investment. Here, the investor operates with a certain target value for her investment. If the investment appreciates beyond the target value, she encases part of the investment. If the investment depreciates below the target value, the investor brings in fresh funds to bridge the gap. Value averaging ensures that the investor books profits in a rising market and invests in a falling market.

(2) Systematic Withdrawal Plan (SWP)

SWP is a mirror image of SIP. Under SWP, the investor would withdraw constant amounts periodically. The benefits are the same, namely that through SWP the investor can temper gains and losses, though it does not prevent losses. It is also a
tool for investors who need a recurring income to meet their monthly outflows.

The withdrawal is done by the AMC through a re-purchase of the requisite number of units on pre-specified dates. The number of units re-purchased would vary depending on the NAV.

Investors need to note the difference between dividend and SWP. In the case of both dividend payout and SWP, investor receives cheque or credit into her bank account from the scheme. So, some intermediaries incorrectly inform investors that they will receive interest every month. This is completely wrong.

>        A mutual fund never pays interest; what it pays is income distribution i.e. dividend.

>        In a bank fixed deposit, the investor receives regular interest while the capital is protected. In a SWP investor receives a regular cash flow. However, it investment in the scheme has not earned that much of income, capital is eroded.

>        Unlike dividend, where investor does not need to pay a tax (the scheme pays instead), SWP has income tax implications, arising out it being a re-purchase transaction.

(3)   Systematic Transfer Plan (STP)

An investor who has won a lottery or received a year-end bonus can invest the receipts in a debt scheme and do a STP into an equity scheme. The regular investment in the equity scheme would operate like a SIP. The money going out of the debt scheme would be like a SWP. Thus, STP is a combination of SIP and SWP.

Mutual funds make it convenient, and sometimes free of cost, to systematically transfer investments between schemes of the same mutual fund.

8.   Switches, Triggers and Dividend Transfer Plan (DTP)

Investors may switch their money between two schemes of the same mutual fund (inter scheme switch), or between two options under the same scheme (intra- scheme switch).

In the earlier STP example, the investor moving his money out of the debt fund is said to have switched out of that fund. The transfer into the equity fund is a switch into that fund.

Similarly, an investor may switch between the dividend and growth options of the same scheme. This may be necessitated by permanent changes in the tax position of the investor. Since dividend and growth options would have different NAVs, the switch would operate as a re-purchase from one option and investment into the other option, with the resulting tax implications.

Within the dividend option, dividend pay-out and dividend re-investment are sub-options where the NAV is the same. Therefore, a switch between these two sub-options does not entail a re-purchase and fresh investment. Such a switch transaction between payout and re-investment would be tax-neutral.

Investors can also define triggers for certain transactions. For instance, the investor can set a trigger that if the index goes beyond 30,000 or NAy goes above 15, her units are to be automatically re-purchased, entirely or partly. There are two benefits of such triggers:

>        The investor does not need to follow the market closely and give the repurchase transaction at the right time. Since re-purchase is automatic, the investor does not miss any opportunity on account of paucity of time, travel, etc.

>        The investor does not fall into the trap of holding on to an investment out of greed, after she has earned her targeted return.

Another facility is the dividend transfer plan. An investor who has opted for the dividend option can issue standing instructions that the money should be invested in a specified scheme of the same mutual fund.

While SIP is offered by all schemes, other facilities are scheme specific. The Scheme Information Document would provide details of the facilities available in any specific scheme.

9.   Steps to Invest / Dis-invest Mutual Fund Units (Other than through Stock Exchange)

>>        A first-time investor in mutual funds needs to visit a capital market intermediary to complete the KYC formalities and obtain the KYC acknowledgement.

>>        An investor who is investing in any mutual fund for the first time has to fill the complete application form that is available along with the KIM. Based on that, the mutual fund will allot a folio number to the investor. Subsequent transactions with the same mutual fund can be effected by merely filling a transaction slip (full application form is not required). This enhances the convenience in investing with that mutual fund. Only while investing with another mutual fund where the investor does not have a folio, the second mutual fund’s application form will need to be filled.

>>        The investor needs to decide the scheme to invest, depending on her asset allocation needs  and the risk-return evaluation of the schemes.

>>        Besides the scheme, she also needs to decide on the option and sub-option viz. growth, dividend payout or dividend re-investment.

>>        In case she wants to opt for SIP, SWP or STP, the date for the systematic transaction needs to be specified. For instance, if the salary is normally received on the 7th of the month, the investor can add a margin and specify 1 0h of the month as the SIP date. Similarly, the SWP date can be set to match the cash flow needs of the investor.

>>        If the investor wishes to benefit from the triggers, DTP or any other facility, then the appropriate instruction has to be registered with the mutual fund.

>>        Re-purchase of open-end schemes would be effected based on transaction slip executed by the investor. The slip would specify either the number of units to re-purchase or the amount for which re-purchase is to be effected.

The investor needs to hand over the duly tilled form / transaction slip along with the payment (if new units are being purchased) to the distributor or office of the AMC or investor service center of the RTA. Based on this, the investor would be allotted units. However, the number of units allotted would depend on the NAV that is used. Cut-Off time for determining the applicable NAV is explained later in this Page.

10.  Steps to invest / Dis-invest Mutual Fund Units (Through Stock Exchange)

Close-end schemes and exchange traded funds (ETFs) are listed in the stock exchange. They get traded, like any share, through the stock exchange trading system.

SEBI was keen to leverage on the reach and cost-efficiency of the stock exchange system. Therefore, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) extended their trading platform to help the stock exchange brokers become a channel for investors to transact in Mutual Fund Units.

BSE’s platform is BSE STAR Mutual Funds Platform. NSE’s platform is called NEAT MFSS. These are essentially order routing systems. Both platforms operate from 9 am to 3 pm on every working day. Through these platforms, fresh subscriptions in a mutual fund, as well as additional purchases can be made. Redemptions too are possible. The transactions may be in physical form or demat form.

In the normal course, transactions are entered in the system at their proposed value. Redemption requests can however, be given in number of units. The transaction slip generated by the broking system, which also includes the time stamp, is the acknowledgement for the investor:

>>           If the transaction is in physical form, then the stock exchange broker would need to send the documents to the nearest RTA. Thereafter, the normal process for handling physical applications would be applicable.

>>           In other cases, the stock exchanges, together with their clearing corporation, handle the first leg of the transaction, viz, investor’s subscription or re-purchase request. The second leg of the transaction, namely sending units against investors’ subscription, or sending money against the re-purchase request, is the responsibility of the RTA.

In the stock exchange, the investor may give a cheque to the stock exchange broker, who in turn transfers money to the clearing corporation. To protect the stock exchange broker from bounced investor cheques, the demat units are made available in the broker’s pool account initially. He can then transfer the units to the investor, after confirming receipt of investor’s funds.

Unlike transactions in shares and listed close ended schemes done through the stock exchange’s normal trading system, mutual fund transactions through the exchanges’ order routing system are not backed by the exchange’s Settlement Guarantee Fund. Responsibility for settlement is that of the AMC. However, the normal stock exchange redressal mechanism would be available to address any investor complaints.

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11.  Mutual Fund Utilities (MFU) —The Aggregator

Investors who have invested in schemes of multiple mutual funds know the inconvenience of having to visit the offices or websites of multiple AMCs or RTAs. Similarly, distributors have to visit multiple offices to submit the transactions of their customers in different mutual funds. MF Utilities India Pvt Ltd. (MFU) is the mutual fund industry’s “Shared Services” initiative to solve such problems.

The MFU initiative seeks to solve these problems and to remove many duplication of activities and thus save cost. The prime objective of MFU is to “aggregate the transactions” and act as an order routing system.

MFU is formed by AMCs of SEBI registered mutual funds under the aegis of AMFI. Objectives include investor empowerment, distributor convenience, consolidation of information to various agencies, operational efficiency for RTAs and benefits to AMCs, thereby benefiting all stakeholders in the industry. It also provides for a centralised complaints management and tracking system.

Under MFU, investors can use a Common Account Number (CAN) to transact across various AMCs. KYC-compliant investors can obtain CAN by submitting the CAN Registration Form at any POS of MFU or a distributor signed with MFU or at a participating AMC branch.

With the CAN, investors can invest with multiple mutual funds using a common application form and a single cheque. The system also maps existing folios across mutual funds based on PAN, holding pattern and other parameters.

MFU offers 24×7 information access including Online Common Account Statement, Composite Portfolio information, Portfolio holding and scheme related information. It also offers industry level value added services like alerts, triggers, reminders etc. Thus, investors can monitor and manage their investments more effectively.

Further details including form downloads are available at www.mfuindia.com

12.  Cut-Off Time for Mutual Fund

If a mutual fund sells new units at yesterday’s NAV and invests the proceeds in the market today or tomorrow, there is a fear that the market would have changed during the interim. If the market falls before the fund manager invests the money, then the scheme (i.e., all unit holders in the scheme) benefits. If, on the other hand, the market gains before the fund manager can invest the money, then the unit holders in the scheme suffer.

This risk of gain floss is obviated if instead of yesterday’s NAV (historic NAV), the NAV as on the transaction date or a future date (forward NAV) is applied for the investment / redemption transaction. This, too, has its issues, as discussed earlier.

After considering all aspects, in particular the need to protect long-term investors from the machinations of short-term investors, SEBI has prescribed a cut-oft time, to determine the applicable NAV. These are given in Table 15.2 For liquid schemes:

>>      Day(s) on which the money markets are closed, or otherwise not accessible, are not treated as business day(s).

>>      NAV is to be calculated for every calendar day, irrespective of whether or not it is a business day.

These cut-off regulations are applicable to all schemes, other than those that have substantial investment in foreign securities, whose valuation depends on time zones other than Indian Standard Time. Further, it is logical that this is not relevant for trades in listed mutual fund units between buyers and sellers in a recognised stock exchange.

The onus is on the AMC to deposit the investor’s cheque / DD in the bank “with utmost expediency, prudently utilizing the appropriate banking facility”. If an investor suffers a loss on account of lack of such prudence, then AMC will need to cover the investor for such loss.

As a further safeguard, SEBI has stipulated that:

>>           Application should be received before the cut-off time applicable.

>>      Money for the entire subscription / purchase should have been credited into the account of the scheme before the cut off time.

>>      The funds should be available for utilization before the cut-off time (3 pm) without availing any credit facility, whether intra-day or otherwise, by the respective scheme.

>>      The provisions regarding cut-off timing, receipt of application, credit to the account of the scheme and funds availability, are equally applicable in the case of switch-in to a scheme (by switching out of another scheme of the same mutual fund).

Despite such fine-tuning of cut-off times, a loophole still remains. Investors can bounce their cheque after seeing subsequent market performance. The provisions of the Negotiable Instruments Act, 1881 regarding imprisonment of signatories of a bounced cheque would not also apply to such cases because there is no prior flow of consideration from the fund to the investor.

Real Time Gross Settlement system of fund transfer by RBI has minimised the problem. Still, AMCs are best advised not to accept cheques from “habitual cheque bouncers”. A mechanism for AMCs to share details of such investors would be useful for the industry.

13.  Official Points of Acceptance by SEBI

SEBI has designated official points of acceptance that can time-stamp documents for the purpose of determining the applicable NAV. These are:

>          Offices of AMCs.

>          ISCs of RTA.

>          Stock exchange brokers authorised for the purpose.

>          Clearing members of the stock exchange.

>          Depository Participants (only for redemption of demat units).

Although distributors and branches of banks are permitted to accept applications, they are not designated as official points of acceptance for time- stamping purposes.

Mutual funds need to disclose “official” points of acceptance of transactions in their offer documents and web site. The “cut-off time’s is to be reckoned at these official points. All purchase and redemption applications must be demonstrably received by the mutual fund at these “official” points of acceptance of transactions.

All these official points are required to have time stamping machine(s). For a given machine, the running serial number would be stamped from the first serial number of the machine and continue to be stamped up to its maximum capacity. Only, thereafter would the cycle be repeated.

Each and every application for the purchase and the corresponding payment instrument need to be stamped on the face and back respectively, indicating the date and time of receipt and running serial number. The running serial number on the application and the corresponding payment instrument need to be the same.

Each and every request / application for redemption has to be stamped on the request / application and on the investor’s acknowledgement copy (or twice on the request / application if no separate acknowledgement is issued), on the face, indicating the date and time of receipt and running serial number.

Bunching of applications by giving single serial number is not permitted.
It is stipulated that the time stamping machine should have a tamper proof seal. For maintenance and repairs, the ability to open the seal must be limited to the vendor or nominated person(s) of the mutual fund, and a proper record of such repress, etc. has to be maintained. Any breakage of the seal and / or breakdown of the electronic time stamping process must be duly recorded by the mutual fund and reported to the trustees. There must be a process of verifying the accuracy of the time being stamped in such situations.

While every effort has to be made to ensure uninterrupted functioning of the time stamping machine, in case the machine develops a technical snag, the mutual fund has to take prompt action to rectify the situation. During such a period, a mutual fund is expected to adopt an alternative method of time stamping applications, which needs to be approved by both the Board of AMC and the trustees. An audit trail has to be available to check and ensure the accuracy of time stamping process during such a period.

Any alternate methods of transaction adopted by a mutual fund that are not paper based, or do not have an electronic trail, e.g. phone, SMS etc. have to be converted into a physical piece of instruction and time stamped in accordance with the above guidelines.

Mutual funds have to maintain and preserve all applications / requests, duly time stamped as aforesaid, so as to produce them as and when required by SEBI or auditors appointed by SEBI. No blank document shall be time stamped. Genuine errors, if any, during the time stamping shall be recorded with reasons and the corresponding applications I requests shall also be preserved as above.

The periodic reports of the trustees shall contain a declaration on whether the trustees are satisfied with the systems and procedures of the mutual fund in this regard.

14.  Post-Investment Services

>>        Units need to be allotted, excess application money has to be refunded and email / SMS has to be sent specifying the number of units allotted to the applicant as soon as possible but not later than five working days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unit holders.

>>        Mutual funds need to send consolidated (across all mutual funds in the country) statement of account for each calendar month, by the 10th of the following month, to the investors in whose folios transactions has taken place during that month.

>>        Mutual funds may dispatch the statement of accounts to the unit holders under SIP or STP or SWP, once every quarter ending March, June, September and December within 10 working days of the end of the respective quarter. The first statement of accounts should however be issued within 10 working days of the initial transaction.

>>        Mutual funds also need to provide statement of accounts to unit holders within 5 working days, without any charges, if specific requests are received from the investors. Further, if so mandated, a soft copy of the statement of accounts shall be emailed to the unit holders on a monthly basis.

>>        Mutual funds also have to provide statement of accounts to those unit holders who have not transacted during the last six months prior to the date of generation of the statement of accounts. In such cases, the statement of accounts may be issued along with the scheme’s Portfolio Statement or Annual Report and should reflect the last closing balance and value of the units prior to the date of generation of the statement of accounts. Further, if so mandated, a soft copy of the statement of accounts shall be emailed to the unit holders instead of a physical statement.

>>        Scheme should be available for ongoing transactions / trading within 5 business days of allotment.

>>        Mutual funds are required to dispatch dividend warrants to the unit holders within 30 days of declaration of the dividend.

>>        Despatch of redemption or re-purchase proceeds has to be made within 10 working days from the date of receipt of request.

For any delayed payment, the AMC is liable to pay interest @ 15 per cent per annum to the unit holders. The AMC must ensure that the interest amount due for the period of delay in dispatch of re-purchase or redemption and / or dividend is added to the proceeds when such payments are made to the investors. Such interest shall be borne by the AMC(s).

15.  Who Can Distribute Mutual Funds and Earn Brokerage

All persons engaged in sales and marketing of mutual funds need to pass the NISM Series V-A: Mutual Fund Distributors Certification Examination (www.nism.ac.in) (for which I have had the privilege of developing the official courseware).

People who are above 50 or have over 10 years of experience in mutual funds are exempted from passing the examination. (www.nism.ac.in ). However, they need to attend the specified refresher course.

See also  Financial Statement of Mutual Fund

The examination is relevant for:

>>        Mutual fund distributors who are individuals;

>>        Employees of organisations engaged in sales and distribution of mutual funds;

>>        Stock exchange brokers desirous of handling mutual fund transactions;

>>        Employees of call centers involved in servicing mutual fund investors;

>>        Employees of asset management companies, especially persons engaged in sales and distribution of mutual funds.

After passing the examination, the person needs to register with AMFI for the AMFI Registration Number (ARN) before she can operate as an AMFI Registered Mutual Fund Adviser (ARMFA).

Intermediaries including the sales personnel of intermediaries engaged in sales / marketing need to obtain NISM certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN) from AMFI apart from AMFI Registration Number (ARN). The Intermediaries have to ensure that the employees quote the EUIN in the Application Form for investments.

Postal agents, retired government and semi-government officials (class III and above or equivalent), retired teachers and retired bank officers with a service of at least 10 years, and other similar persons (such as Bank correspondents) as may be notified by AMFI/ AMC from time to time are allowed to sell units of simple and performing mutual fund schemes subject to passing the Series V-B: Mutual Fund Foundation Certification Examination (www.nism.ac.in) (for which, again I have had the privilege of developing the official courseware).

Diversified equity schemes, fixed maturity plans (FMP5) and index schemes that have returns equal to or better than their scheme benchmark returns during each of the last three years are treated as simple and performing mutual fund schemes.

SEBI has stipulated that mutual funds shall pay brokerage only to ARMFA or corporate intermediaries registered with AMFI and who have completed the Know Your Distributor (KYD) process (discussed in next section).

Further, distributors are not entitled to brokerage on their own investments. It is also stipulated that brokerage is not payable on investments made by the sponsor of a mutual fund in the schemes sponsored by fund.

SEBI has defined “brokerage” to include all amounts paid to an intermediary for selling the product of the mutual fund. This includes commissions on sale of mutual funds, incentives, consultancy fees, contest awards that have monetary value, gifts, as well as any lump sum payments.

Even ARMFAs earn a commission subject to their bringing in 12 investors in a year into the AMC whose schemes they want to market, failing which, they should bring in 25 investors in a year into the mutual fund industry (all AMCs together).

For corporate AMFI registered intermediaries, the qualifying criteria to earn commission from any AMC are:

  • Bringing in 100 investors into the AMC in a year.
  • Alternatively, the average assets under management during the year have to be in excess of 1 crore.

In either case, the applications need to be from investors other than “associates”. If more than 75 per cent of the gross funds mobilized are from associates, then the agents needs to ensure that they service at least 200 investors who are not associates or employees of associates.

16. Know Your Distributor (KYD) in Mutual Fund

The KYD procedure consists of document verification and bio-metric process. The distributor is required to apply for KYD simultaneously along with application for registration of ARN. Separate forms are prescribed for individuals and non- individuals.

AMFI has engaged the services of Computer Age Management Services Ltd. (CAMS) to carry out the KYD process through their centres referred as “CAMS POS.

KYD application along with the requisite documents could be submitted at any of the CAMS POS, a list of which is available at www.amfiindia.com or www.camsonline.com. The distributors are required to produce, in person, the original documents for over the counter verification at the time of submission of their applications along with self-attested photocopies of the same.

The bio-rnetric process involves taking impression of right hand index finger and registering the same for identification purpose. The said process is carried out at the CAMS POS at the time of submission of applications for registration or renewal of ARN along with the KYD application form.

>>      Individual and senior citizen category distributors are required to visit in person for biometric registration.

>>      In case of non-individual entities, bio-metric is required to be carried out for the authorised persons / officials as indicated in the Table below :

Know Your Distributor (KYD) in Mutual Fund
[Know Your Distributor (KYD) in Mutual Fund]
In case of non-individual entities, the persons who are required to undertake bio-metric process as indicated in the above table are also required to comply with the document verification process by submitting the required documents i.e. proof of identity and proof of address as applicable to individual applicants. However, they are not required to fill in their individual bank details/ furnish the documents in support thereof.

The ARN Holder has to obtain the acknowledgement from the CAMS POS confirming completion of KYD process. Existing ARN holders will have to send photocopy of the said acknowledgement to the AMOs with which they are empanelled.

SEBI has barred payment of commission / incentive to the distributors, who have not complied with KYD, with effect from 1 April 2011.

17. Brokerage, Commission and Transaction Charge

SEBI has been working towards a framework where the role of brokerage earning from the mutual fund is reduced. Initially, entry load was banned with a view to reduce the kitty that was available to pay brokerage. AMFI has also stipulated that brokerage which is paid upfront to the distributors should not exceed 1 %, with effect from 1 April 2015.

Distributors are being encouraged to perform the role of investor adviser and recover a commission for their services directly from the investor through a separate cheque. The commission level is left to market forces. There is no statutory ceiling on the commission that an investment adviser can charge for the advisory services.

Mutual funds have also been permitted to pay a transaction charge to distributors (besides the brokerage / commission discussed above), subject to the following restrictions:

>>        For existing investors in a mutual fund, the distributor may be paid 1 00 as transaction charge per subscription of 10,000 and above.

>>        As an incentive to attract new investors, the distributor may be paid 1 50 as transaction charge for a first time investor in mutual funds.

>>        The terms and conditions relating to transaction charge have to be mentioned in the application form in bold print.

>>        The transaction charge, if any, shall be deducted by the AMC from the subscription amount and paid to the distributor; and the balance shall be invested.

>>        The statement of account shall clearly state that the net investment as gross subscription less transaction charge and give the number of units allotted against the net investment.

>>        Distributors can choose to opt out of charging the transaction charge. However, the “opt-out” shall be at distributor level and not investor level, i.e. a distributor shall either charge all investors (across mutual funds), or refrain from charging all investors. They can even choose to opt out of recovering the transaction charge for specific categories of schemes.

>>        As part of the “opt-in” application, the distributor has to commit to the following:

– Agree to keep all investors informed of the applicable transaction charges.

–        Agree not to indulge in any kind of malpractice / mis-selling, including unwarranted splitting of investments and wrong declarations of a “new investor” for the purpose of receiving transaction charges.

–        Understand that no transaction charge will be levied for any transaction channeled through the stock exchange route.

>>        The AMCs is responsible for any malpractice / mis-selling by the distributor while charging transaction costs.

>>        There shall be no transaction charge on subscription below 1 0,000.

>>        In case of SIPs, the transaction charge is applicable only if the total commitment through SIPs amounts to 1 0,000 and above. In such cases the transaction charge shall be recovered in 3 to 4 instalments.

>>        There shall be no transaction charge on transactions other than purchases / subscriptions relating to new inflows.

>>        Mutual funds have been asked to institute systems to detect if a distributor is splitting investments in order to enhance the amount of transaction charges and take stringent action, including recommendations to AMFI to take appropriate action.

18. Investor Empowerment

Various measures taken to protect investors . Besides, investors have also been empowered in various ways.

(1) Application Supported by Blocked Amount (ASBA)

ASBA is a facility, where the investor does not have to pay money to the scheme upfront. The money can remain in the investor’s bank account. The banker will block the amount required to support the investor’s mutual fund application. The amount for which units are allotted will be transferred by the bank to the scheme, on allotment. Until then, the investor continues to earn interest on the funds.

Mutual funds have been asked to make ASBA facility available for all NFOs. A list of bankers offering ASBA facility is available in SEBI’s website www.sebLgov.in.

(2) Transfer of Units

SEBI has directed AMCs to ensure that demat units held by investors are freely transferable. Only in the case of ELSS, the transferability may be restricted, on account of the government’s ELSS guidelines.

(3) Change of Distributors

Investors are permitted to change their distributors or go direct. Mutual funds are not allowed to ask for a “No objection” from the existing distributor of the investor.

(4) Direct Plan

Every mutual fund scheme has to offer a “Direct Plan” in which brokerage to distributor cannot be charged. The saving helps in boosting the returns for the investors who invest in the Direct Plan.

(5) Investor Education

Several investor education programs are conducted by SEBI, AMFI, AMCs, distributors, stock exchanges and the media. Educative material is also made available in their websites. These efforts have increased the awareness about mutual funds, though much more needs to be done.

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