Investor Services - Chapter 4

Investor Services - Chapter 4

The chapter on investor services broadly covers the eligibility criteria for investing in mutual funds, the documentation and other formalities required as well as an understanding of the types of transactions with special focus on systematic transactions like SIP / SWP / STP etc.

Who Is Eligible To Invest In Mutual Funds

The following categories are eligible to purchase Units of most schemes of mutual funds after going through the basic documentation and KYC required. We shall see the KYC requirements in greater detail in the latter part of this chapter.

Resident Indian investors

  • Resident Indians above the age of 18 can invest singly or jointly
  • Minors below the age of 18 need to invest through their guardians
  • In case of HUFs the Karta can invest on behalf of the Hindu Undivided Family (HUF)

Non-resident Indian investors

  • NRIs and PIOs can invest in mutual fund schemes on full repatriation or non-repatriation basis. Documentation is a little more elaborate in their case
  • While NRIs used to invest in India through the PIS route, these NRIs have now been brought at par with FIIs for India investments.
  • Foreign investors can also invest in equity schemes of MFs registered with SEBI after completing the due KYC process

Non-individual Investors

In this case, the investments are made by authorized persons on behalf of institutions and organizations with an appropriate resolution authorizing them to invest on behalf of the institutions. These non-individual investors can include

  • Companies / corporate bodies, registered in India
  • Registered Societies and Co-operative Societies
  • Trustees of Religious and Charitable Trusts
  • Trustees of private trusts
  • Partner(s) of Partnership Firms
  • Association of Persons or Body of Individuals, whether incorporated or not
  • Banks (including Co-operative Banks and Regional Rural Banks)
  • Other Mutual Funds registered with SEBI
  • Foreign Portfolio Investors registered with SEBI via direct or indirect route
  • International Multilateral Agencies approved by the Government of India
  • Army/Navy/Air Force, Para-Military Units and other eligible institutions
  • Scientific and Industrial Research Organizations
  • Universities and Educational Institutions


KYC Requirements For Mutual Fund Investors

Individual and non-individual investors, including joint holders, NRIs, Power of attorney holders and issuers and guardians in the case of minors have to be KYC compliant, irrespective of the investment value. This applies for any transaction including new / additional purchases, switch transactions, new SIP / micro SIP, new STP registrations, new dividend transfer plan (DTP) etc. What is KYC all about?

The KYC process involves establishing the identity and address of the investor as required under the Anti-money Laundering Laws. The application for investment must be accompanied by the acknowledgement for having completed the KYC process issued by the KYC registration agency (KRA).

KYC Documentation

For the KYC process the following documents are required.

  • PAN Card with photograph except if you are exempt from PAN. Even in such cases, alternate proof of identity and address has to be provided
  • Proof of Address such as passport, Voter Id, Driving License, bank statement, utility bill and other specified documents. The copies of the documents produced have to be self-attested and the originals have to be furnished for physical verification

KYC Registration Agencies

SEBI has instituted a framework of Centralised KYC Registration Agencies (KRAs) for the benefit of investors. The functions of the KRA include receiving, storing, safeguarding and retrieving the KYC records in digital form for each client. The registered intermediaries shall upload the KYC data with Central KYC Records Registry (CKYCR) in respect of all individual accounts opened on or after August 1, 2016 where KYC is required to be carried out.

E-KYC service of UIDAI

It has now been decided to accept e-KYC service launched by UIDAI also, as a valid process for KYC verification. The information containing relevant client details and photograph made available from UIDAI as a result of e-KYC process shall be treated as sufficient proof of Identity and Address of the client. However, in person verification (IPV) is a must for larger transactions

KYC through Intermediaries

Investors are permitted to hold mutual funds in demat form and also as statement certificates. In case of units held in demat form for applicants using the stock exchange infrastructure, KYC performed by the DP will be sufficient.



The KYC process for mutual funds entails the following steps.

  • The requisite KYC form has to be filled up and completed in all respects.
  • Supporting documents of identity and address proof are to be submitted, which are verified with the original documents.
  • The original documents of identity and address proof are returned to the investor post verification and forms are uploaded
  • The intermediaries are authorised to perform an In Person Verification (IPV) of the investor, which is mandatory.
  • Once this is completed and details are uploaded on the KRA server, the KYC process is complete
  • Where investment is made by a minor, KYC requirements have to be complied with by the Guardian.
  • In case of Power of Attorney KYC must be completed by the Power of Attorney holder and by the investor
  • For NRI investors PAN is the sole identification number for KYC compliance. A copy of the passport/PIO card/OCI card and overseas address proof is mandatory

Additional KYC Requirements for Institutional Investors

Since institutional investors are not natural persons, authorised individuals investing on behalf of the institution must complete the KYC process. The following are required.

  • Proof of the eligibility for the investing institution to invest including MOA, AOA and board resolution passed to that effect
  • Authorisation for the official to sign the documents on behalf of the investing institution via Board Resolution.
  • Investors other than individuals have to provide details of the ‘Ultimate Beneficial Owner’ (UBO) of the investments
  • Client Due Diligence (CDD) process under Prevention of Money Laundering Act, all categories of investors of SEBI registered intermediaries
  • Foreign Account Tax Compliance Act (FATCA) compliance of the investing institution must also be certified

Transactions With Mutual Funds

  • Fresh purchase of mutual fund units in a scheme can be made through the new fund offer (NFO) or even subsequently in open-ended schemes
  • Application forms are downloadable from the websites of the AMCs. Investors can use the form to make a fresh purchase or a new purchase
  • Choose between Direct Plan and Regular Plan depending on your choice. Direct plans entail lower TER but come without advisory support
  • Investors must select between the Dividend option, dividend reinvestment option or the growth option for their holdings
  • It is mandatory for investors to provide the bank details of the sole/first holder of the folio in the application form mentioning account number, type and IFSC code. For unit-holders opting for demat, bank account details provided in the application form should match with demat account.

Nomination facility

The applicant can make a nomination in favour of a maximum of three nominees and indicate the percentage to each nominee. The nomination can be made at the time of application or subsequently at any time.

 Handling additional Purchases

Once an investor has a folio number generated with an AMC, subsequent investments with the same mutual fund do not call for the full application form and documentation. Only a transaction slip needs to be filled giving the folio number and submitted with the requisite payment. A transaction slip can be used to make additional purchases in the same scheme or to make fresh purchases in another scheme of the same mutual fund.


Online / Internet Transactions

Investors need to apply for the online facility. Accordingly, the investor will be allotted a user name and Personal Identification Number (PIN). This can be used by the investor to make additional purchases of units online and also pay with internet banking. This facility can also be used for direct plans. Of course, payments can also be made offline using the cheque / DD facility but ideally use the same mandated bank account for cheque issue.

Payments using UPI

The UPI allows fund transfer between accounts through the mobile app. This is available only to android phone users. One can use multiple UPI apps available such as BHIM, SBI UPI, HDFC UPI, PhonePe, Aadhaar app etc.

Other payment mechanisms

MF investing also supports other payment mechanisms as under:

  • Aadhaar Enabled Payment Service (AEPS) allows bank to bank transaction using the Aadhar number of the customer; which is linked to bank account and mobile.
  • National Unified USSD Platform (NUUP) allows transactions even without smart-phone and internet. Most leading banks support the NUUP service
  • Cards are the most commonly used mode of digital payments. Debit cards can be used but you are not allowed to invest in MFs using credit cards.
  • E-Wallets are a virtual or digital version of the physical wallet. Money is loaded to the E-Wallet like Paytm and used to make payments and transfer funds to MFs
  • MF investors can also use the One-Time Mandate (OTM) facility to authorize their bank to process debits to their specified bank account raised by a specified mutual

Allotment of Units to the Investor

Since entry load is banned, units in an NFO are sold at the face value. However, in case of purchases above Rs. 10,000/- for application sourced from a distributor a transaction charge of Rs. 100-150 shall be deducted from the investment amount. The price at which units are sold to an investor as part of ongoing sales in an open-ended scheme is the sale price, which in turn is the applicable NAV.

Repurchase / Redemption of Units

Investors in an open ended scheme can offer units for repurchase / redemption to the mutual fund. The transaction slip has to be filled out to effect the re-purchase. The folio number, names of the unit-holders and the scheme, plan and option from which the redemption is requested should be clearly mentioned. Redemption can be in terms of amount or in terms of number of units. The request should be signed according to the mode of holding of the folio. When your mutual fund account has a series of purchases and redemptions, the FIFO method is used to account for units.

Receiving money on redemption of units

The investor has various options for receiving the money, due to him from the scheme on re-purchase of Units including by cheque or by electronic transfer (NEFT) directly into your bank account.

Understanding cut-off time for purchase and redemption of units

Purchase and redemption prices are a function of the applicable NAV. SEBI has prescribed cut-off timing to determine the applicable NAV. Normally; the transaction is processed on same day NAV if submitted before cut-off time and at next day NAV if submitted after cut-off time. There are nuanced differences for different classes of funds but this is the general rule that is followed for cut-off timing. To ensure precision in usage of cut-off time, all applications for purchase or redemption need to be time-stamped at the point of acceptance.

Investment Plans and Services

Broadly, funds offer 3 types of options viz. dividend payout, growth and dividend re-Investment. Most mutual fund schemes offer two options – Dividend and Growth. The portfolio returns are the same for all three options.  However, they differ in the structure of cash flows and income accruals for the unit-holder and hence impact taxability.

When dividend is paid by a mutual fund scheme, the NAV of the units falls to that extent. In addition, equity and debt fund schemes are liable to pay dividend distribution tax on the dividend distributed. This tax payment also reduces the NAV. However, the dividend payout does not change the number of units held by the investor. The dividend received in the hands of the investor does not bear any tax.

Systematic Transactions In Mutual Funds

Mutual funds provide transactional facilities that allow investors to tailor investments and structure pay-outs to suit their specific needs and goals. Systematic transactions, such as systematic investments, withdrawals and transfers, enable periodic investments and withdrawals that investors can align to their unique needs. Signing up for the systematic transactions also enables these transactions to be executed without intervention. Here are some popular systematic transactions.

Systematic Investment Plan (SIP)

SIP is an approach where the investor invests constant amounts at regular intervals. A benefit of such an approach, particularly in equity schemes, is that it averages the unit-holder’s cost of acquisition since more units are bought for the same amount of investment when the price/markets are down and fewer units when the price/markets are high. This is called rupee cost averaging and makes SIPs a veritable tool of long term wealth creation.

Systematic Withdrawal Plan (SWP)

Just as investors do not want to buy all their units at a market peak, they do not want to risk redeeming all their units in a market trough. Instead, investors can opt for the safer route of offering for re- purchase, a constant value of units over a period of time. SWPs also have another important role to play. When you need regular income, investors normally opt for the dividend plan. But dividend plans of debt plans and liquid plans can be very tax ineffective as they attract dividend distribution tax (DDT) of 29.12%. This can be managed better through SWPs that are also more tax efficient. In fact, SWPs are used for a number of specific reasons.

  • SWPs minimise the risk of redeeming all the units during a market trough
  • SWPs can meet liquidity needs for regular expenses
  • In case the scheme is profitable, the regular SWP ensures that some part of the profits are regularly swept out
  • As discussed before, SWPs can be more tax-efficient to take money out of the scheme as a re-purchase (on which there is no income distribution tax) as compared to dividends

Systematic Transfer Plan (STP)

In a STP the amount that is withdrawn from a scheme (called the source scheme) is re-invested in another scheme (called the target scheme) of the same mutual fund. Thus, it operates as a SWP from the first scheme, and a SIP into the second scheme. Since the investor is effectively switching between schemes, it is also called “switch”. Let us understand the application of STP with an example.

Say Investor X has received a lump sum of Rs.10 lakhs from the sale of land in his village. He wants to invest the money but he is not sure if this is the right time to enter equity funds or whether he should wait. In this case he can opt for an STP. He can invest the corpus in a liquid fund and design an STP in such a way that a fixed sum of money is swept out of the liquid scheme each month and invested in an equity scheme. This STP has some key benefits.

  • The idle money is invested in a liquid fund so it earns more than what you would earn in a normal bank savings account. It is also liquid
  • Secondly, liquid funds do not entail exit loads and hence there is no additional cost to sweeping funds out of the liquid fund
  • Thirdly, as far as the equity fund is concerned, it works exactly like a SIP and thus offers the benefit of rupee cost averaging for the investor
  • It is a more tax efficient way of taking funds out of one account and into another account

Dividend Transfer Plans

Dividend Transfer Plan is a facility that allows investors to sweep the dividend earned in a mutual fund investment into another scheme of the same mutual fund. Investors with a low risk profile can get some benefits of diversification by transferring dividends earned from debt funds into equity funds. Similarly, dividends earned in equity funds can be transferred into debt funds to rebalance the portfolio and manage risks.

This DTP has an important role to play in long term wealth creation. One of the downsides of the dividend plans is that it does not give the benefit of compounding, which is why people prefer growth schemes. That problem can be solved by DTP as you also have the choice of where and how much risk to select. The only downside to this method is that each time you earn dividend you end up paying 11.648% effective DDT on equity fund dividends and 29.12% effective DDT on debt fund dividends.

Operational aspects of Systematic Transactions

Here are the operational aspects of systematic transactions.

  • Mutual funds specify the schemes in which systematic transactions are offered. The fund will also specify the minimum investment for each tranche
  • Investors can choose the amount of the periodic transaction, the frequency (monthly, quarterly and semi-annual), the period over which the transaction will be done and dates.
  • New investors have to submit the application form as well as the SIP enrolment form to register for an SIP.
  • Information available under the folio, such as unit-holder details and mode of holding, will apply to the SIP investments also. Signature of the investor in application form / folio records and enrolment form has to match.

SIP Top-up Facility

Mutual funds provide an additional facility through an SIP to enhance the disciplined savings of investors. It is called the SIP Top-Up facility. Some funds also refer to this as a stepped-up SIP. Investors have the option to increase the SIP amount at regular intervals chosen by them. The increase can be set in terms of a fixed amount increase or a percentage increase. SIP top-ups or stepped-up SIPs are important because normally income levels rise over time. Your savings and investment need to keep in sync with that. If that does not happen, then you are investing below your potential. This gap is filled up by the top-up facility.


What do you understand by mutual fund trigger? It is common for investors to miss opportunities of buying or selling because they could not give the requisite instructions in time. This shortfall can be effectively addressed through the trigger option offered by some mutual funds. Here is how triggers work and funds normally define what can be set as a trigger.

For example, an investor can book profits by specifying a trigger at a certain NAV. Once the NAV reaches that level, the units would be automatically redeemed. The investor can also set a stop-loss trigger by identifying the level of the NAV or the percentage depreciation in the value of the investment at which the investment should be redeemed. Similarly, an investor can set a trigger to transfer money into an equity scheme when the market goes down, say 20% and so on. You need to check the types of triggers that your fund offers and select the appropriate one.

Pledge / Lien of Units

Banks lend money against pledge of Units by the Unit-holder. A Pledge Form is executed by the unit-holder with the name of the party in whose favour the Units are pledged. Units offered as security for a loan should have completed the lock-in period, if any. All unit holders of the folio must sign the form requesting the marking of the lien in favour of the lender. Once Units are pledged, the Unit-holder/s cannot sell or switch-out the pledged units, until the pledgee gives a written NOC.

Transmission of Units

Transmission is the process of transferring units to the successor in the event of the death of the unit holder. The person entitled to receive it depends upon the folio conditions of joint holding and nomination. If the first holder passes away, the second holder is substituted as first holder. In a singly held folio with nominations, the units are transferred to the nominee.