Mode of operation
Also written Mode of holding · Holding pattern · Either or survivor · Joint or either or survivor
How a jointly held investment may be transacted — jointly, or on an either or survivor basis — chosen at application and recorded in the folio along with the order of holders.
In plain language
Two or three people can own an investment together. Somebody still has to decide who may sign for it.
That is the mode of operation. It is chosen when the account is opened and recorded in the folio. The holders may agree to operate it jointly, so every transaction needs all of them. Or they may choose either or survivor, so any one of them can act, and the survivor can act if one dies.
How many people may hold together depends on the product. A mutual fund folio, a demat account, shares, bonds and most company deposits allow up to 3 holders. A bank fixed deposit, the Senior Citizens Savings Scheme and the NSC allow only 2. An NPS account allows none — it is held in the sole name of the subscriber.
One more rule catches people out. Whatever the mode of operation, the first holder is the one who matters for money and paperwork. Payouts, tax and all correspondence go to the first holder alone.
How it works
Section 17.1.5 treats this as part of the mandatory investor information on the application form.
How many holders the product allows:
| Product | Maximum holders |
|---|---|
| Mutual funds, shares, bonds, demat account, post office savings bank accounts, most company deposits | 3 joint holders |
| Bank fixed deposit, Senior Citizens Savings Scheme, NSC | 2 holders |
| National Pension System | Sole name of the subscriber |
The choice itself. Where an investment or account can be held jointly, the investors can decide on the mode of operation. The holders may have the option to operate the investment either jointly or on either or survivor basis.
What the first holder gets, whatever the mode. The name of the first holder is used to create the investment records. All payouts — dividend, interest and redemptions — are made in the name of the first holder. The tax benefits from the investments and any tax liability on the income accrue to the first holder. Correspondence regarding the investments is sent to the first holder. The names of all the joint holders are, however, maintained in the records.
Signatures do not follow the mode of operation. In case of a joint application, the form must provide for signatures of all joint holders irrespective of the holding pattern. The signature is the investor's identity in the records of the issuer and is verified for every transaction.
Where it is recorded. Section 17.1.6 lists the mode of holding and operating the account, in case of joint holders, among the folio conditions recorded at account creation, alongside nomination, address and bank details. Those conditions apply to all investments held under that folio.
A worked example
Illustrative. Mr and Mrs Bhatt open investments together in the same month.
| Investment | Holders allowed | They hold it as | Mode chosen |
|---|---|---|---|
| Mutual fund folio | Up to 3 | Mr Bhatt first, Mrs Bhatt second, son third | Either or survivor |
| Bank FD of Rs 5,00,000 | Up to 2 | Mr Bhatt first, Mrs Bhatt second | Either or survivor |
| NSC of Rs 1,50,000 | Up to 2 | Mrs Bhatt first, Mr Bhatt second | Jointly |
| NPS account | 1 | Mr Bhatt only | Not applicable |
The consequences show up immediately.
The mutual fund pays a dividend of Rs 18,000. It is credited to the account in Mr Bhatt's name, because he is the first holder — even though three people own the folio and any one of them can transact. The income is taxable in his hands, and the account statement comes addressed to him.
The NSC is held jointly, so redeeming it needs both signatures. Its interest, though, is Mrs Bhatt's alone, because she is the first holder there.
When the son wants to add his name to the NPS account, he cannot: the NPS is held in the sole name of the subscriber.
And the detail candidates miss: when they opened the mutual fund folio as either or survivor, the application form still needed the signatures of all three holders. Either or survivor governs later transactions, not the opening form.
Why NISM asks about it
Chapter 17 (Operational Aspects of Investment Management), section 17.1.5 (Mandatory Investor Information), with the folio record in 17.1.6. This is heavily examinable factual detail: the maximum number of joint holders by product, the two modes of operation, and the first-holder rule for payouts, tax and correspondence.
Common exam traps
- 3 for mutual funds, shares, bonds and demat; 2 for bank FDs, SCSS and NSC; 1 for NPS. These three numbers are the question.
- The first holder takes the payouts and the tax, whatever the mode of operation and whoever actually transacts.
- All joint holders sign the application form irrespective of the holding pattern. Either or survivor does not reduce the signature requirement at the opening stage.
- Mode of holding and mode of operation are recorded together and apply to every investment under the folio, not to one transaction.
- Either or survivor is not a nomination. Nomination decides who receives the money after all holders die; mode of operation decides who may transact while they are alive.
- A minor cannot be a joint holder operating the account — an investment in a minor's name is operated by the guardian.
Check yourself
1.In a joint application, whose signatures must the form provide for?
- a)Only the first holder, since payouts are made in that name
- b)All joint holders, irrespective of the holding pattern
- c)Only those holders who will operate the account
- d)Any two of the holders
Show the answer
Answer: (b) All joint holders, irrespective of the holding pattern
The workbook is explicit: in case of a joint application, the form must provide for signatures of all joint holders IRRESPECTIVE OF THE HOLDING PATTERN. So even where the mode of operation is "either or survivor", every holder signs the application. The first holder does, separately, receive the payouts, tax benefits and liability, and correspondence.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- 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.
- NominationThe account holder's written direction naming who receives the securities on death — up to ten nominees for a demat account, with percentages that must total 100, mandatory for single holdings.
- Registered bank accountsThe bank accounts an investor links to a mutual fund folio for pay-outs — up to 5 for an individual and 10 for a non-individual — with one marked as the default for redemption proceeds.
- Bank mandateThe record of the bank account linked to an investor's trading, demat or mutual fund folio, used to move money in and out of investments; changed by submitting a form with a cancelled cheque.
- GuardianThe adult who transacts on behalf of a minor investor, completes KYC in their own name, and signs the application and payment instruments, because a minor cannot contract.
- PINS accountThe designated bank account through which an NRI's or PIO's purchases and sales of listed Indian securities must be routed, and through which the bank reports those investments to the RBI.
- Pre-nuptial agreementAn agreement entered into before marriage setting out how finances and other matters will be dealt with if the couple separates — a device whose legality in India the workbook says is not established.