Investor Services — the whole life of a folio

Chapter 9 is worth 20% of the V-B paper — twice as much as any other chapter. It is also the most practical. This is the work you will actually do at a distributor's desk: filling forms, chasing documents, explaining why the NAV the client got was not the NAV they expected.

The workbook opens with the reason all of this is standardised: a mutual fund serves a large number of investors, so processes must be uniform. Standardisation lets investors know what to expect and when — and, just as importantly, what not to expect.

9.1 The NFO — how a scheme reaches the market

Units are offered to investors for the first time through a New Fund Offer (NFO). The steps:

1. The AMC decides on a scheme, using inputs from the Chief Investment Officer (CIO) on investment objectives that would benefit investors, and from the Chief Marketing Officer (CMO) on market interest.
2. An AMC can have only one fund/scheme in a category. So the NFO must be in a category where the AMC has nothing — or in a category where multiple schemes are allowed: Sector/Theme, Index, or Fund of Funds.
3. The AMC prepares the Scheme Information Document, which must be approved by the Trustees and the Board of Directors of the AMC.
4. Documents are filed with SEBI. SEBI's observations must be incorporated. After trustee approval, the scheme can be issued.
5. The AMC fixes a timetable, runs advertising that complies with SEBI's advertising code, holds events for intermediaries and the press, and distributes forms.

Three dates matter for an open-ended NFO:

Close-ended schemes have only the first two. There is no re-opening date, because the scheme neither sells nor re-purchases units. Investors must buy and sell on the stock exchange where the scheme is listed.

Under SEBI guidelines, NFOs other than ELSS can remain open for a maximum of 15 days.

9.3 Plans and options — two decisions, not one

These are two separate choices, and candidates mix them up constantly.

The PLAN decides who you route through.

Every mutual fund must offer two plans: a Regular Plan and a Direct Plan. The Direct Plan has a lower total expense ratio, excluding distribution expenses and commission, and no commission is paid from it. Because the TER differs, the two plans have separate NAVs.

The Direct Plan is only for investors who purchase units directly from the fund. If the investment is routed through a distributor, it is the Regular Plan — there is no choice about it. And apart from these two, the AMC cannot offer separate plans based on expense ratio.

The OPTION decides what happens to income.

Three options, all with the same portfolio, so the portfolio returns are identical. What differs is the structure of cash flows, and therefore taxability, number of units, and value of those units — so the post-tax return differs.

From 1 April 2021 the dividend option was renamed Income Distribution cum capital withdrawal (IDCW), to reflect the actual situation about the income earned.

Two words to learn precisely: after a dividend is announced and until it is paid, the NAV is the cum-Dividend NAV. Once paid, the reduced NAV is the ex-Dividend NAV. Re-investment happens at the ex-dividend NAV.

Some schemes — liquid and debt funds with very short-term maturity — even declare a dividend daily, subject to availability of profits.

9.4 Allotment of units

In an NFO, units are sold at the face value of ₹10, because entry load is banned. Investment amount ÷ ₹10 = units.

Timelines the exam loves:

• Allotment is completed within 5 business days after NFO closure.
• Where the applicant quoted a demat account, units are credited within 2 working days.
• Non-depository applicants get their account statement within 5 business days of NFO closure.
• If an application is rejected, the full amount is refunded within 5 business days from NFO closure. If refunded later, interest at 15% p.a. is paid for the delay period and charged to the AMC.

Ongoing offer: the sale price is the applicable NAV (no entry load is permitted). ₹12,000 at a sale price of ₹12 gives 1,000 units.

Bonus issue: the investor pays nothing. In a 1:3 bonus, one free unit for every three held. The net assets of the scheme are unchanged and only the number of units rises, so the NAV falls proportionately and the value of the holding does not change.

9.5 Account statements

The AMC identifies a common investor across mutual funds by their PAN.

What counts as a "transaction"? Purchase, redemption, switch, dividend payout, dividend reinvestment, SIP, SWP, STP and bonus transactions.

9.6 Who can invest

Individual investors: resident adults above 18, singly or jointly not exceeding three names; minors through guardians; HUFs, where the Karta invests on behalf of the family and adds "HUF" after his name; NRIs and PIOs resident abroad, who need a PIO Card or OCI Card, and who may invest on a repatriable basis (sale proceeds can go abroad) or non-repatriable basis (they cannot); and foreign investors, who can invest in equity schemes of SEBI-registered MFs after completing KYC.

For minors, payment must come from the bank account of the minor, the parent or legal guardian, or a joint account of the minor with the parent or legal guardian. For existing folios the AMC insists on a change of pay-out bank mandate before redemption is processed.

Non-individual investors include companies, registered societies and co-operative societies, trustees of religious and charitable trusts and private trusts, partners of partnership firms, AOPs/BOIs, banks and financial institutions, other SEBI-registered mutual funds, FPIs, international multilateral agencies approved by the Government, Army/Navy/Air Force and para-military units, scientific and industrial research organisations, and universities.

FPIs meeting KYC can invest through two routes: the direct route (holding units in a demat account through a SEBI-registered DP), or the indirect route (holding units via a Unit Confirmation Receipt, UCR).

Some schemes restrict entry — certain Gilt plans are open only to Provident, Superannuation, Gratuity and Pension Funds and to religious, charitable and private trusts. So always check the "Who can Invest?" section of the SID, especially for a first-time investor.

9.7 Filling the application form

ARN box: write "Direct" for a Direct Plan; write the ARN or RIA number if routed through a distributor or adviser.

Holders: up to three. The folio is created in the name of the first holder, and all benefits — dividends, redemption payments, tax benefits — go to the first holder.

Minor as unit-holder: invests through a guardian who complies with KYC and PAN as if investing for themselves. The guardian is a natural parent or court-appointed legal guardian (notarised photocopy of the court order). Date of birth and proof of age of the minor are required. An investment for a minor cannot have joint holders.

PoA as unit-holder: both the PoA holder and the issuer must comply with KYC and PAN, and a certified copy of the PoA must be submitted. The grantor can continue to operate the account despite granting a PoA. The PoA holder can conduct all transactions except make or change nominations.

Joint holding: once a folio is created as a jointly held account, there can be no change in the joint holders — none added, none deleted, except in the event of death can a name be deleted.

Once the first holder's PAN is validated for KYC, the address in the KYC form overrides the address in the application form.

Bank details are mandatory for the sole or first holder. If the pay-out account differs from the account used to pay, you must attach one of: an original cancelled cheque with the account number and first holder's name printed on it, a self-attested pass book or bank statement with entries not older than 3 months, or a letter on the bank's letterhead.

Nomination: as per the SEBI circular dated 10 January 2025, investors can nominate up to 10 persons.

9.8 Money in — payment mechanisms

Additional purchases in an existing folio need only a transaction slip with the folio number, not a full application form.

Repurchase: the re-purchase price is the applicable NAV less exit load, if any. The investor can specify either an amount or a number of units. Units are redeemed on a First-In-First-Out (FIFO) basis. If redemption takes the folio below the scheme's minimum holding, all units may be re-purchased and the folio closed.

A switch is a redemption from one scheme and a purchase into another, combined into one transaction.

Digital modes: internet banking, NEFT (batched through the day), RTGS (instantaneous), IMPS (instant interbank), SWIFT for transfers from abroad (slow — it passes through multiple banks and geographies), NACH (launched by NPCI, replacing ECS for repetitive payments, with same-day presentation and settlement), UPI (a Virtual Payment Address links the app to a bank account; multiple accounts can be linked but one must be the default), AEPS (Aadhaar-linked, using the fingerprint as the password), NUUP (dial *99#, works without a smartphone or internet, available in 11 regional languages), and cards.

Three prohibitions worth memorising:

• Mutual fund purchases using credit cards are not allowed.
• E-wallet subscription is capped at ₹50,000 per investor per financial year, an umbrella limit covering E-wallet and cash together, per mutual fund per financial year. Only amounts loaded through cash, debit card or net banking can be used; amounts loaded via credit card, cash back or promotional schemes cannot. No third-party transactions through e-wallets.
• SEBI has mandated Two-Factor Authentication (2FA) for subscription and redemption transactions in mutual fund units.

ASBA (Application Supported by Blocked Amount): the NFO application carries an authorisation to the bank to block the application money. The money leaves the account only on allotment, so until then it keeps earning interest, and because exactly the amount due is transferred, the investor does not have to wait for any refund.

One-Time Mandate (OTM): a standing authorisation for a specified mutual fund to debit a specified bank account through NACH. It works at the folio level. Frequencies include monthly, quarterly, half-yearly or "As and when presented" — and under that last category there is no limit on the number of transactions as long as the total stays within the daily maximum specified. Registering an OTM can take 3 to 4 weeks.

Cheques and DDs: the instrument should be local or payable at par; not post-dated (except future SIP instalments); and not stale — the cheque date should not be more than 3 months older than the date it is to be banked. DDs are generally accepted only where there is no official collection centre.

Third-party payment is one made through a bank account other than that of the first holder. It is not accepted, except:

• Payment by parents, grand-parents or related persons on behalf of a minor, out of natural love and affection or as a gift, not exceeding ₹50,000 for each regular purchase or per SIP instalment
• Employer payments on behalf of an employee through payroll deductions, and custodians on behalf of FPIs
• AMC paying its empanelled distributors commission in the form of units

In every case a Third-Party Declaration form is needed, and KYC and PAN of the third party are mandatory irrespective of the amount. Pre-funded instruments such as demand drafts issued against cash for ₹50,000 or more will not be accepted.

Cash: mutual funds usually do not accept cash. The exception exists for small investors who may not be taxpayers and may not have PAN or bank accounts — farmers, small traders, businessmen, workers — up to ₹50,000 per investor, per mutual fund, per financial year. Available only to resident individuals, sole proprietorships and minors investing through guardians, who must be KYC compliant whether or not they have a PAN, and the application must be submitted in physical mode. Crucially, repayment — redemptions, dividends — can only be through the banking channel.

Not accepted at all: stock-invests, postal orders, money orders, outstation cheques, and post-dated cheques (except for systematic investments).

9.8.2 Money out — and the Instant Access Facility

An individual investor may register up to five bank accounts; a non-individual investor ten. The first holder must be an account holder in each. One is the default account. If a redemption asks for credit to an account that is not registered, the money goes to the default account and the change request is not processed.

Instant Access Facility (IAF) credits redemption proceeds on the same day as the request. It may be offered only in Liquid schemes. The limit is ₹50,000 or 90% of the latest value of the investment, whichever is lower — per day, per scheme, per investor.

9.9 Cut-off time and time stamping — the most tested section

Two rules that decide most questions:

• For purchases in equity and debt schemes, the size and time of the application no longer matter. What matters is when the funds are available for utilisation. The old rule — same-day NAV for cheques below ₹2,00,000 — was withdrawn by the SEBI circular of 17 September 2020.
• The cut-off timing is not applicable for NFOs and International Schemes.

Time stamping. Mutual funds disclose Official Points of Acceptance (OPoAs) in the SID and on their website. Applications must be time-stamped at the OPoA. A distributor may accept a request as a convenience, but the time that counts is when it reaches the OPoA — not when the investor handed it to the distributor. Machines carry a tamper-proof seal, and opening them for repairs is permitted only by vendors or nominated persons, documented and reported to the Trustees. Numbering runs from the first to the last number of the machine before a new cycle starts, so the daily time stamping does not start at serial 1.

For non-financial transactions such as a change of address, time stamping is not relevant — date stamping is. For online transactions, the time as per the web server to which the instruction goes decides the NAV.

9.10 KYC

Everyone must be KYC compliant, irrespective of the investment value — individuals, non-individuals, joint holders, NRIs, PoA holders and the issuers of the PoA, and guardians of minors.

PAN card with photograph is the proof of identity for all applicants except those specifically exempt. SEBI allows intermediaries to verify PAN online at the Income Tax website without insisting on the original card, provided another proof of identity is presented.

Exempt from producing PAN:

• Transactions on behalf of the Central or State government and by officials appointed by the court
• Investors residing in the state of Sikkim
• UN entities and multilateral agencies exempt from paying taxes or filing returns in India
• Investments — including SIPs and lump sums — up to ₹50,000 per investor per year per mutual fund

That last category is the Micro-SIP rule: SIPs where annual investment (12-month rolling or April–March financial year) does not exceed ₹50,000. The ₹50,000 is a composite limit for the small investor's Micro-SIP and lump sum together. These investors must still be KYC compliant with a KRA and must quote the PAN Exempt KYC Reference Number (PEKRN).

Centralised KYC. Once an intermediary has done In-Person Verification (IPV) — which is mandatory — and uploaded the data to a KYC Registration Agency (KRA), the KYC is valid across the whole capital market, not just mutual funds. The name, designation and organisation of the person doing the IPV must be recorded on the form. An IPV performed by a Scheduled Commercial Bank is acceptable for mutual fund investments.

By notification dated 26 November 2015 the Government authorised CERSAI to act as the Central KYC Records Registry (cKYCR) under the PML Rules 2005. Intermediaries upload KYC data to cKYCR for all individual accounts opened on or after 1 August 2016. cKYCR de-duplicates records and issues a unique KYC Identifier.

KYC for special cases:

• Minors — the guardian completes KYC; proof of age of the minor is required
• PoA — both investor and PoA holder must comply, and a PoA holder cannot apply for KYC compliance on behalf of the issuer
• NRIs — PAN is the sole identification number; a copy of the passport / PIO card / OCI card and overseas address proof is mandatory

Institutional investors additionally need proof of eligibility (the Memorandum and Articles or Trust Deed must actually permit such investment; in some states the Charity Commissioner's permission is needed for religious and charitable trusts), authorisation to invest (a Board Resolution), and authorisation for the official to sign.

Ultimate Beneficial Owner (UBO). Non-individual investors must declare their UBO. A UBO is one who owns or is entitled to more than 25% of a company's shares or profits, more than 15% in a partnership or body of persons, and in a trust the settlor, the trustees, and beneficiaries entitled to 15% or more of the benefits. UBO requirements do not apply to listed companies or their subsidiaries.

FATCA and CRS information is required where the country of birth, citizenship, nationality or tax residency is other than India — including for guardians.

9.11 Systematic transactions

SIP — Systematic Investment Plan. Constant amounts at regular intervals. Because a fixed rupee amount buys more units when the NAV is low and fewer when it is high, the average cost of acquisition falls below the average NAV over the same dates — which is why it is called Rupee Cost Averaging. Payment through post-dated cheques, NACH or standing instructions. An SIP can also be initiated during an NFO, and the initial investment to start an SIP is typically lower than for a lump sum.

SWP — Systematic Withdrawal Plan. The mirror image: a constant amount withdrawn periodically, so the investor is not forced to exit everything in a market trough. Exit loads and taxes apply, and the exit load increases the number of units that must be redeemed to deliver the fixed amount. Some schemes offer withdrawal of only the appreciation or the dividend — a variable SWP, whose advantage is that the capital invested is not withdrawn. SWP is particularly useful during the retirement phase.

STP — Systematic Transfer Plan. A variation of SWP where the amount withdrawn from the source scheme is re-invested into a target scheme of the same mutual fund — an SWP out of one and an SIP into the other. One tranche is a switch; multiple pre-defined tranches make it an STP. Each transfer is a redemption, so exit loads and taxes apply. Helpfully, the minimum investment and redemption limits specified by the mutual fund do not apply to an STP.

DTP — Transfer of Income Distribution cum capital withdrawal plan (dividend transfer plan). Dividends earned in one scheme are invested into another scheme of the same fund. The investor must hold units in the IDCW option. Registering a DTP overrides any existing payout or re-investment instruction, and it covers all units held under that scheme, plan and option. The dividend is invested in the target scheme on the next business day after the record date. The minimum application amount for the target scheme does not apply. The mandate terminates automatically when the source holding becomes nil.

Operational points. For a minor, the SIP is registered only till the date the minor attains majority, even if instructions run beyond it. A new investor submits both the application form and the SIP enrolment form; an existing investor submits only the enrolment form. The enrolment form must reach the fund a specified number of days before the first instalment, typically 15 to 30 days — so a form submitted on 5 September at a fund requiring 30 days, with the 15th chosen as the SIP date, takes its first instalment on 15 October. An existing OTM can shorten this.

SIP Top-up. The instalment rises at chosen intervals, by a fixed amount or a percentage. A ₹2,500 monthly SIP topped up ₹500 annually runs ₹2,500 → ₹3,000 → ₹3,500. At 10% annually it runs ₹2,500 → ₹2,750 → ₹3,025. Investors set either an upper limit or a cease date; after that the top-up stops but the SIP plus top-up amount stays constant till the end of the tenure. Funds may withhold top-up for Micro-SIPs, or allow it only if SIP plus top-up does not exceed ₹50,000 in a rolling 12-month period or financial year.

Triggers. An instruction to act automatically when a market level, NAV level, date or percentage fall is reached — profit booking, stop-loss, or buying into equity after a fall. A trigger is a one-time facility that extinguishes once activated and the corresponding action is completed. If the market keeps rising after a profit-booking trigger fires, the investor loses the further gain.

9.13 Non-financial transactions

Nomination. The nomination in a folio applies to all investments under the folio. With multiple nominees the unit-holder must state percentages totalling 100%; if percentages are not clearly indicated, the nomination is made equally. In a joint holding every unit-holder must sign, irrespective of the mode of holding.

Hard rules:

• Only individual investors can make a nomination.
• Investments by minors cannot have a nomination.
• A Power of Attorney holder cannot make a nomination.
• Nominee can be: an individual (including minors and NRIs), central and state governments, local authorities.
• Nominee cannot be: a trust (except a religious or charitable trust), a society, a body corporate, a partnership, the Karta of an HUF, or a PoA holder.
• A new nomination automatically supersedes the earlier one. Death of a single nominee cancels the nomination; with multiple nominees, units pass to the remaining nominees.
• For units in demat form, the demat account's nomination applies, governed by the depository's bye-laws.
• Investors may empower one nominee (excluding minor nominees) to operate the folio if the investor is physically incapacitated but still has the capacity to contract, specifying a percentage or absolute value that may be encashed. There is no restriction on how many times a nomination can be made, changed or cancelled.

Critically: nomination is only an authorisation for the mutual fund to transfer units to the nominee. The nominee holds the units in trust for the legal heirs. It does not create any title or beneficial interest in the nominee.

Pledge / lien. Units offered as security must have completed any lock-in period. All unit-holders must sign, irrespective of mode of holding. Once pledged, the unit-holder cannot sell or switch out the pledged units until the pledgee gives written no-objection. The minimum redemption requirement does not apply when the lender enforces the pledge.

Demat. Mutual funds must offer the option to hold units in demat form and must obtain an ISIN for each option of a scheme. If the application data does not match depository data, the application is invalid for demat mode and units may be issued in physical mode instead. Converting demat units back to physical form is called re-materialisation.

Change in folio details. Changes to name, status/nationality, PAN, address, contact details, and name of spouse or father go through the KRA change form, and the KRA communicates the update to all mutual funds. But bank account changes, mode of holding and nominations must be updated with each mutual fund separately. A change of guardian in a minor's folio needs the new guardian's KYC, PAN, bank details and a no-objection certificate from the existing guardian.

Transmission is the transfer of units to the person entitled on the death of a unit-holder:

The fund will insist on KYC of the nominee, the death certificate, and an indemnity. SEBI directed AMCs to adopt a standard Transmission Request Form and a common set of documents prescribed by AMFI.

9.14 Special investor categories

Minor turned major. On the day the minor attains majority, the folio is frozen for operation by the guardian and no further customer-initiated transactions are permitted until the status is changed. All standing instructions — SIP, SWP, STP — cease to be executed from that date. (IDCW pay-out or re-investment, however, continues to be processed, net of TDS.) The documents required with the MAM form: PAN card copy, KYC acknowledgement, a cancelled cheque with the name pre-printed or latest statement/passbook, signature attestation by the banker, a nomination form, and a fresh SIP/STP/SWP mandate to continue those. The PAN issued to a minor must be resubmitted for a new card with the same number but the new signature. Because minors' demat accounts are single-name only, a new demat account must be opened and holdings transferred.

NRI to Resident Indian. The returning investor cannot operate NRO/NRE/FCNR(B) accounts and must open a Resident Rupee Account; a Resident Foreign Currency (RFC) account may be opened to hold balances transferred from NRE/FCNR(B). A new demat account with "Resident" status is opened, balances transferred, and the NRI demat account is closed. The AMCs and the KRA must be informed of the change of status, address and bank details.

Change in Karta of an HUF. A letter from the new Karta, the KYC documents of the new Karta and the HUF, plus: an attested copy of the death certificate, a bank certificate stating the signature and details of the new Karta, and an indemnity bond signed by all co-parceners and the new Karta.

9.16 Unclaimed assets — MITRA and DigiLocker

Folios go quiet because investors lose track, or die, or because there is no PAN, email or valid address — so the folio never appears in the CAS. Such inactive folios become susceptible to fraudulent redemptions.

SEBI's measures include norms for inactive/dormant folios, mandating contact and bank details, mandating investors to either nominate or expressly opt out, simplifying transmission, and a centralised mechanism for reporting the demise of an investor.

The RTAs built the Mutual Fund Investment Tracing and Retrieval Assistant (MITRA) — a platform allowing industry-level search for inactive and unclaimed folios. It is hosted by the two Qualified RTAs, CAMS and KFintech, as agents of the AMCs, and reachable from the websites of AMCs, the QRTAs, AMFI and SEBI.

DigiLocker is the Government of India's digital document wallet. Bank statements, insurance policies and NPS statements are already there; including mutual fund and demat holding statements would put an individual's entire financial holdings in one account. DigiLocker also has a nomination facility — nominees are authorised to access the user's digital information upon the demise of the user, and the user must supply the nominee's mobile number and email address.