Individual investors
Investors who buy mutual fund units for themselves or their family — resident adults, minors through a guardian, HUFs, NRIs/PIOs and eligible foreign nationals — as distinct from institutions.
In plain language
Chapter 12 of the workbook splits every mutual fund investor into two broad camps: individual investors and institutional investors. The two need different paperwork and go through different processes, and the split starts with a simple question — is the money being invested for a person, or for an organisation?
Individual investors invest for their own or their family's benefit. The category is broader than it first sounds: it covers not just an adult buying units in his own name, but four other situations the workbook treats the same way.
How it works
The workbook lists five types of individual investor:
- Resident Indian adult individuals — above 18, investing singly or jointly with up to 3 holders.
- Minors — under 18, investing through a parent or legal guardian.
- Hindu Undivided Family (HUF) — a family's pooled money, managed and transacted on by a designated member, the karta, who signs indicating he acts on behalf of the HUF.
- Non-Resident Indian (NRI) / Person of Indian Origin (PIO) resident abroad.
- Foreign investors — foreign nationals who meet KYC requirements may invest in equity schemes floated by domestic mutual funds.
A default rule sits behind the list: unless specifically marked non-resident, every individual investor is assumed to be resident. Residential status itself is determined under the Finance Act, 2020, based on citizenship, period of stay in India, and total income from Indian sources, with effect from Assessment Year 2021-22.
The category also has a second, wider use in the paper: Chapter 2 uses "institutional investor" for the equity market generally to mean financial institutions, venture capital firms, mutual funds, foreign financial institutions and banks — a different context from the individual-versus-institutional split that governs mutual fund folio documentation.
A worked example
A family opens different kinds of mutual fund accounts on the same day.
| Investor | Category | Who signs |
|---|---|---|
| Mr Verma, 45, resident | Individual — resident adult | Himself |
| His son, 15 | Individual — minor | His father, as guardian |
| The Verma HUF, Rs 30,00,000 corpus | Individual — HUF | Mr Verma, as karta, writing "HUF" beside his signature |
| Verma Textiles Pvt Ltd, Rs 50,00,000 surplus | Institutional, not individual | Two authorised signatories per board resolution |
Three of the four are individual investors even though one of them — the HUF — is not a natural person at all, because the workbook classes HUF with individuals rather than institutions. Only the private limited company, Verma Textiles, needs the extra documentation an institutional folio requires — MoA and AoA extracts, a board resolution and a list of authorised signatories.
Why NISM asks about it
Chapter 12 (Investors in Mutual Funds), section 12.1, opens the chapter with this five-way list, immediately followed by section 12.2's institutional list. Its sample question asks which of a set of investor types is an individual investor, with HUF as the reliable trap answer — candidates often place it with institutions. Chapter 15 (Non-Financial Transactions) separately governs change requests for individual investors' folios.
Common exam traps
- HUF is an individual investor in the workbook's classification, not an institutional one, even though the karta acts through a designated role rather than personally.
- Foreign investors may only buy equity schemes, not the full range of mutual fund products, and must still meet KYC.
- A joint individual folio caps out at 3 holders.
- Residential status is a Finance Act, 2020 test — citizenship, stay in India, and Indian-source income — not simply where the investor happens to be when he invests.
- This is not the same as a "Retail Individual Investor" in the primary-market allotment-category sense — a different, narrower concept about applying for a fixed rupee value in a public issue. This chapter's split is about mutual fund folio documentation.
- Do not confuse this Chapter 12 split with Chapter 2's institutional investor in the general share-market sense (FIs, VC firms, mutual funds themselves) — same words, two different uses in the paper.
Check yourself
1.Institutional investors in mutual funds include:
- a)Public and private companies, partnership firms and associations of persons, and societies and trusts — all of these
- b)Public and private companies only
- c)Partnership firms and associations of persons only
- d)Societies and trusts only
Show the answer
Answer: (a) Public and private companies, partnership firms and associations of persons, and societies and trusts — all of these
The chapter lists seven categories, and all three named are among them.
1. Private and Public Companies - These are companies set up under the Indian Companies Act, and have the Memorandum of Association (MoA) and Articles of Association (AoA) which lay out their objectives and functions. They are governed by their Board of Directors.
2. Partnership Firms - These are firms set up by individuals who are partners coming together under a partnership deed.
3. Association of Persons (AoP) - These are associations set up by individuals to undertake a set of activities as defined by their charter.
4. Societies and Trusts - These are organisations that pool-in individual contributions and manage them according to set objectives. Trusts and societies can be set up for social, religious, and educational purposes.
The remaining three: 5. Banks and Financial Institutions (FIs) · 6. Foreign Portfolio Investors (FPIs) · 7. Overseas Corporate Bodies (OCBs) — the last being currently prohibited from investing in Indian mutual funds.
Six may invest; one may not.
Why the distinction from individuals matters. There are two broad categories of investors in a mutual fund: individual investors and institutional investors. The investment process and the documentation details are different for both these categories.
**A corporate investor, for instance, must produce a copy of Memorandum and Articles of Association, clearly highlighting that such investment is permissible, a board resolution for the investment, a list of Signatories and Operating Instructions, and KYC documents for all Authorized Signatories.
And nomination is closed to them entirely: only individual investors can make a nomination.
2.________ cannot be a nominee of a mutual fund investor.
- a)Power of Attorney holder
- b)Legal heir
- c)Minor
Show the answer
Answer: (a) Power of Attorney holder
A Power of Attorney holder cannot make a nomination. PoA holders are also not authorised to change the nomination details in an investor's folio. They also cannot be a nominee of the original investor.
Three bars in one passage, and the third answers the question.
Option C is expressly permitted. Nominees can be minors, in which case, the details of guardian will also have to be provided — with one restriction: first holder in a mutual fund folio cannot be the guardian of a minor nominee for that folio.
Option B names the natural nominee. Nothing prevents an investor nominating his legal heir; indeed the purpose of nomination is that in case of death of an investor, the MF will transmit the units in favour of the nominee.
Why the attorney is excluded. He may do almost everything else: PoA holders usually exercise all the rights of an investor in a mutual fund... They can do normal transactions such as purchase and redemption of units on behalf of the investor. They also operate the bank account of the investor.
But nomination decides who takes the property on death — a personal decision of the owner, and one in which an attorney naming himself would be in obvious conflict.
Who may nominate at all: only individual investors can make a nomination, and investments by minors cannot have a nomination.
How many: nomination can be made in favour of a maximum of three nominees. Where there are multiple nominees, the unitholder(s) must define the percentage holding for each nominee making a total of 100 percent.
And the investor must make a choice one way or the other — AMCs and RTAs send a communication on fortnightly basis and display a pop-up message... where nomination is not made or opt-out declaration not submitted.
3.Arjun Kapoor, the sole holder of a folio, wants to nominate his minor son Kabir. Which of the following is correct?
- a)Kabir can be the nominee, and Arjun himself should be named as Kabir's guardian for the nomination
- b)Kabir can be the nominee; guardian details must also be given — and Arjun, as the first holder of the folio, cannot be the guardian of the minor nominee for that folio
- c)Kabir cannot be a nominee, since minors cannot enter into contracts
- d)Kabir can be the nominee, and Arjun's Power of Attorney holder must be named as the guardian
Show the answer
Answer: (b) Kabir can be the nominee; guardian details must also be given — and Arjun, as the first holder of the folio, cannot be the guardian of the minor nominee for that folio
The workbook: "Nominees can be minors, in which case, the details of guardian will also have to be provided. First holder in a mutual fund folio cannot be the guardian of a minor nominee for that folio." Chapter 15 repeats: "Minor may be a nominee. In that case, a guardian must also be mentioned to manage the investments on behalf of the nominee."
Arjun is the first (and sole) holder, so someone else — Kabir's mother, for instance — must be named as guardian.
Option A is the trap — it is natural for a parent to be the guardian, but the first holder is specifically barred from being the guardian of a minor nominee for that folio. The nomination only takes effect on Arjun's death, when he could not act for Kabir anyway.
Option C confuses two rules. Minors cannot make a nomination — "Investments by minors cannot have a nomination" — but they can be nominees.
Option D is wrong — nothing requires a PoA holder to act as guardian, and PoA holders are kept out of nomination altogether: "A Power of Attorney holder cannot make a nomination. PoA holders are also not authorised to change the nomination details in an investor's folio. They also cannot be a nominee of the original investor."
Other nomination rules: "Only individual investors can make a nomination"; investors may instead "Opt out of Nomination"; and AMCs and RTAs encourage the "choice of nomination" "by sending a communication on fortnightly basis." A DigiLocker nominee "does not override or replace the legal nominee in the folio or demat account."
Where this is taught
Free preparation for NISM Series II-BRelated terms
- Retail Individual InvestorUnder the SEBI ICDR Regulations, 2018, an individual investor who applies or bids for specified securities for a value of not more than Rs 2 lakh.
- Institutional investorsOrganisations rather than individuals that invest in mutual funds — companies, partnership firms, associations of persons, societies and trusts, banks and FIs, and FPIs — each acting through authorised signatories.
- Minor becoming majorThe change of status in a folio held in a minor's name when the minor turns 18 — the new major completes PAN, KYC and bank updates, and no transactions are allowed until the AMC's records show the change.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.