Many decisions need to be made to manage your personal finances and investments as the end of the financial year 2022-23 is approaching in a few weeks. To begin with, it is crucial for mutual funds that you link your Permanent Account Number (PAN) to your Aadhaar before the end of FY 2022-23 on March 31, 2023. If your PAN is not linked to your Aadhaar before the deadline, all financial transactions in your mutual fund portfolios will be prohibited from April 01, 2023, onwards.

In addition, it is essential to submit the details of nominations of your mutual fund investments by March 31, 2023. Failure to comply with these guidelines could lead to your mutual fund investments becoming frozen or inoperative.

The majority of investors’ investment portfolios have long included mutual funds as a foundation. Best mutual funds have succeeded in giving their investors decent returns despite market volatility and have also developed into a reliable source of passive income. Mutual funds cannot be transferred from one unitholder to another other than through redemption and subsequent subscription. However, mutual funds can be passed on in the form of inheritance. For this, it is crucial that the unitholder provide due nomination at the time of the initial application for the purchase of units or at a later date.

What is nomination in mutual funds?

Since the beginning of mutual funds, there has been a column for designating nominees on the physical application forms. It allows the unit holder to nominate a person who may or may not be a relative or a legal heir. Such a person is entitled to claim the units of mutual funds bestowed upon them after the demise of the original investor/unitholder.

Savvy and prudent investors have been nominating their near and dear ones to ensure the smooth transmission of assets after they pass on. Mutual funds are no different, and to be sure, the nomination was a must for folios held in single names. In light of the fintech approach to mutual fund investing, even when you buy mutual funds online, there is an option that you can fill in the details of your nominees.

In case the mutual fund units are jointly held by more than one unitholder, all the unit holders are required to nominate a person jointly who would be entitled to receive the units in the event of the death of all joint holders.

Nomination Rules by the Securities Exchange Board of India (SEBI) for Mutual Funds

According to SEBI’s circular dated June 15, 2022, all present and future investors would have the option of making a nomination for the mutual fund units held by them or opting out of the nomination facility altogether. If existing folio investors do not comply with this norm, then their investments will get frozen, and they cannot transact in them. The deadline is March 31, 2023.

Additionally, SEBI has mandated that all Asset Management Companies (AMCs) provide unitholders with an online and offline option to choose their nominees or decline the nomination. In the case of a physical option, the forms should carry the signature of all the unitholders. In the case of the online option, the forms will use the e-sign facility recognised under the Information Technology Act, 2000, instead of the physical signature of all the unit holders.

Furthermore, mutual fund houses must take all necessary precautions to safeguard the security and confidentiality of customer records and make sure that suitable systems are in place to provide the e-sign option. Unitholders can communicate their preferences to the fund houses, registrar, or transfer agents using a specific form.

AMFI states that an investor may propose no more than 3 nominees. The percentage of units allocated to each nominee should be clearly stated in the nomination. The Asset Management Company will divide the settlement equally among the nominees if this portion is not stated. In the absence of a nomination, the units will be transferred to the account of the legal heir or heirs in accordance with the deceased’s will and the applicable succession law.

How to file for nomination in mutual funds?

The investor who chooses to nominate should begin by completing the account opening form’s nomination section. If the investor fills out the nomination form later, they may send it to the mutual fund’s or its registrars’ designated investor support centre.

According to AMFI, a nomination can be modified later on at any time and as many times as necessary. A link is supplied to the unit holder when submitting the nomination online so that the information can be verified using Two-factor Authentication (2FA). For the online procedure, no form is necessary. Alternatively, an investor can submit the duly filled and signed physical form at any of the Computer Age Management Services (CAMS) centres.

  • If you are an existing investor – Existing investors who previously submitted nomination information before the circular was released are not required to resubmit the declaration. The deadline for investors who have not yet submitted nomination information is March 31, 2023. They can submit their nomination or opt out of nomination via Two-factor Authentication login on investing platforms. The mobile number, email ID, and identification details of the nominee or guardian of the minor nominee are optional.

  • If you are a new investor – Investors opening new trading and Demat Accounts must provide a nomination or opt out of nomination through a declaration form. Where the paperwork is physically signed by the account holder, no witnesses are needed to file the nomination for the trading and Demat Accounts. However, if the account holder uses a thumb impression rather than a signature, a witness signature is necessary. This also applies to nomination or declaration documents submitted online utilising the e-sign feature.

Should you submit a nominee declaration for mutual funds or opt out of nomination?

The process of nomination in mutual funds is crucial because it enables the transfer of your investments to the appropriate claimant in the event of investor death without any legal hassles. A nominee can be any person that you trust the most – spouse, children, friend, etc. In the case of mutual fund units held jointly, the units get transferred to the surviving holder. However, if the nominee information is not available in the case of a solitary unitholder, the legal successor or beneficiary will have to go through a drawn-out process to get the units transmitted.

By submitting a nominee declaration for your mutual funds, you spare your family the trouble of having to prove that they are legally entitled to your investments. You also make it simpler to redeem your investments in the event of the untimely death of the investor, facilitating any financial obligations that may arise. Hence, whether or not the market regulator mandates it, it is strongly advised to provide nomination details for your mutual fund investments. The majority of mutual fund companies currently forbid the opening of new folios in a single-holding mode without nomination.

However, earlier, mutual fund unitholders did not have the option to opt out of the nomination. This new amendment gives them that option, but to avoid any issues with their folios being frozen after the deadline set by SEBI, the unit holders must choose one of the two options before March 31, 2023. Investors that have opted out by submitting a declaration of ‘Do Not Wish to Nominate’ will be unable to redeem their mutual fund units or undertake operations like Systematic Withdrawal Plans (SWP) or Systematic Transfer Plans (STP) from April 01, 2023.

To conclude…

Thus, it will be prudent for every mutual fund unitholder to enlist their nominees if they wish to pass on their holdings through inheritance. Bear in mind that the nomination facility of the mutual funds is the only way to pass on mutual fund units from one unitholder to another without going through the route of redemption.

This article first appeared on PersonalFN here

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