Investors in Mutual Funds

What this chapter covers

Units 12 to 15 carry 30 marks between them — about 7.5 marks for this chapter.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Types of Investors in Mutual Funds · PAN and KYC norms for investing in mutual funds · eKYC, KRA and cKYCR · Documents Required by Different Types of Investors for new folio creation · Nomination and Power of Attorney · FATCA and CRS compliance

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.

12.1 Individual investors

1. Resident Indian adult individuals — investors above 18 years of age, invest either singly or jointly (maximum 3 holders).

2. Minors — an individual investor, who is under 18 years of age, can invest through their parents/Legal guardians.

3. Hindu Undivided Family (HUF) — an Indian structure where the pool of money belonging to a family, is managed by a designated member of the family, identified as 'karta'. Transactions on behalf of HUF are done by the karta, in his name. He indicates that he is acting on behalf of HUF, by writing the "HUF" alongside his name.

4. Non Resident Indian (NRI)/ Person of Indian Origin (PIO) resident abroad — Indian citizens, who are working abroad, and their family residing abroad, are typical NRIs. A PIO is an individual whose spouse, parent or grandparent is an Indian citizen or an NRI.

5. Foreign Investors — foreign nationals who meet KYC requirements may invest in equity schemes floated by domestic mutual funds.

Unless specifically mentioned as non-resident, all individual investors are assumed to be resident. Residential status is determined on basis of his citizenship, period of stay in India and total income from Indian sources.

12.2 Institutional investors

1. Private and Public Companies — set up under the Companies Act, with Memorandum of Association (MoA) and Articles of Association (AoA), governed by their Board of Directors.

2. Partnership Firms — firms set up by individuals who are partners coming together under a partnership deed.

3. Association of Persons (AoP) — associations set up by individuals to undertake a set of activities as defined by their charter.

4. Societies and Trusts — organisations that pool-in individual contributions and manage them according to set objectives... for social, religious, and educational purposes.

5. Banks and Financial Institutions (FIs) — banks are set up under the Banking Regulations Act. Financial institutions are either set up by an Act or as corporations.

6. Foreign Portfolio Investors (FPIs) — foreign institutions that are permitted to invest in the Indian securities markets after having obtained registration as Foreign Portfolio Investor (FPI) from SEBI.

7. Overseas Corporate Bodies (OCBs) — organisations formed by NRIs, or entities in which majority stake is held by NRIs. OCBs are currently prohibited from investing in Indian mutual funds.

The first sample question tests this — Overseas Corporate Bodies are the ones not allowed. The second question confirms that companies, partnership firms, associations of persons, societies and trusts are all institutional investors.

12.3 Investor information and documentation

Individual investors

Name — used to identify the person in whose name the investment has been made... Name should be quoted as per PAN card as it is being validated with Income Tax database. If the response from the Income Tax database returned as Not matched, transactions may get rejected.

Signature — the identity of the investor in the records of the mutual fund. It is verified for every transaction.

Joint holders — an application can have up to three joint holders. They may decide to operate their investments jointly or on either or survivor basis. All joint holders' signatures are captured in the R&T system irrespective of the mode of operation.

Address — to enable physical identification of the investor's location. Therefore, post box numbers are not accepted. In case of an NRI investor, overseas address is required. Address of the first holder is the address for correspondence.

Minors

An individual investor whose age is less than 18 years on the date of investment is a minor investor. If the application is made in the name of the minor, date of birth has to be compulsorily provided along with supporting documents.

Minors are not legally authorised to enter into contracts on their own behalf, or issue cheques to third parties. Therefore, the financial transactions of minors are conducted by their guardian on their behalf.

Guardians have to provide all details, as if they are investing in the mutual fund themselves. Guardian's PAN is provided and the guardian must undergo the KYC process. Guardians are also required to sign the application form and payment instruments on behalf of the minors.

The third sample question tests this — the guardian's PAN is given.

And the money must come from the right account: payment by means of cheque, demand draft or any other mode, to be accepted from the bank account of the minor or from a joint account of the minor with the guardian only. For existing folios, the AMCs should insist upon a change of pay-out bank mandate before redemption is processed. Irrespective of the source of payment for subscription, all redemption proceeds shall be credited to a bank account in name of the minor.

NRI investors

An NRI can invest in mutual funds only from an NRE or NRO bank account. The Non-Resident External Rupee (NRE) account is a rupee account from which money can be sent back to the country of your residence and the Non-Resident Ordinary Rupee (NRO) account is a non-repatriable rupee account.

NRE is repatriable; NRO is not.

An NRI investor, in addition to their normal KYC documents, needs to provide a copy of their passport and overseas address proof to complete their KYC process. Indian PAN is necessary for investments by an NRI.

HUF

A Hindu Undivided Family (HUF) consists of persons descended from a common ancestor. The HUF is represented by the head of the family known as Karta.

Documents: PAN Card of HUF and Karta · HUF deed mentioning details of all members of the HUF such as date of birth, gender, PAN etc · Cheque from bank account in name of the HUF only.

Corporates

Copy of Memorandum and Articles of Association, clearly highlighting that such investment is permissible · Board resolution for the investment · List of Signatories and Operating Instructions · KYC documents for all Authorized Signatories

12.4 KYC norms

In order to ensure that illegal funds are not routed into Indian markets, the government has promulgated the Prevention of Money Laundering Act (PMLA). According to this Act, the identity of those entering into financial transactions must be known and verified. The procedure to do this is now known as KYC (Know Your Customer) norms.

KYC norms apply to opening bank accounts, trading accounts, mutual fund accounts, demat accounts and all such financial relationships. Proof of identity of the customer, and proof of residence are verified.

Proof of identity

Permanent Account Number (PAN) is an identification number issued by the Income Tax authority. PAN has been notified as the single identification number for all financial market transactions. PAN card with photograph is mandatory for all applicants except those who are specifically exempt from obtaining PAN.

Investments (including SIPs and lump sum investments) in Mutual Fund schemes upto Rs.50,000 per investor per year per mutual fund are exempt from PAN requirement. Investors have to give an undertaking to this effect and provide an alternate photo identity such as the Aadhaar card, Passport, Voter's Id, Driving License or other photo-identity card.

The ninth sample question tests this figure — Rs. 50,000.

The registered intermediaries verifies the PAN of their clients online at the Income Tax website without insisting on the original or copy of PAN card.

The name as mentioned in the KYC form shall match the name as mentioned in the Proof of Identity (PoI) submitted.

Box 12.1 — PAN exempt investments

Micro-SIPs i.e. SIPs where annual investment (12 month rolling or April-March financial year) does not exceed Rs 50,000.

Small investors making lumpsum investment upto Rs. 50,000 per mutual fund per financial year.

Rs. 50,000 is a composite limit for the small investor's Micro-SIP and lump sum investments together.

Investment by individuals, minors and sole-proprietary firms within the limits specified above are exempted from the requirement of PAN card. However, the KYC norms have to be complied with a SEBI registered KRA. Investors must quote the PAN Exempt KYC Reference Number (PEKRN) issued by the KRA and submit a copy of the letter along with the application form.

Three categories have no threshold limit at all: investors residing in the state of Sikkim · UN entities / multilateral agencies exempt from paying taxes / filing tax returns in India, etc. · investments on behalf of Government undertakings.

Proof of address

Officially valid document (OVD) defined as per Rule 2 (d) of Prevention of Money-Laundering (Maintenance of Records) Rules, 2005:

the passport · the driving licence · proof of possession of Aadhaar number · the Voter's Identity Card issued by Election Commission of India · job card issued by NREGA duly signed by an officer of the State Government · the letter issued by the National Population Register containing details of name address

Six OVDs. The eighth sample question offers an electricity bill older than three months as the odd one out — a utility bill is not an OVD, and even as a deemed document it must be recent.

Where simplified measures apply, these are also deemed OVDs: identity card/ document with applicant's photo, issued by the Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks and Public Financial Institutions · letter issued by a gazetted officer, with a duly attested photograph of the person.

Where the OVD does not carry an updated address, certain documents serve for the limited purpose of proof of address, provided the client submits an updated OVD within a period of three months:

utility bill which is not more than two months old of any service provider (electricity, telephone, post-paid mobile phone, piped gas, water bill) · property or municipal tax receipt · pension or family pension payment orders (PPOs)... if they contain the address · letter of allotment of accommodation from employer... and leave and licence agreements with such employers.

Two months for the bill; three months to produce a proper OVD.

If communication and permanent addresses are different, then documentary proofs have to be provided for both. The proof of address in the name of the spouse may be accepted.

The copies of the documents (proof of identity and proof of address) produced, have to be self-attested and the originals have to be provided for verification purpose. In case, the originals are not produced for verification then the copies of the documents must be attested by persons authorized to do so.

Uniform KYC

SEBI has mandated a uniform KYC procedure for mutual funds, brokers, depository participants, portfolio managers and venture capital funds. The investors can undergo the KYC process with any of the above intermediaries and it will be applicable for their transactions with the other intermediaries too.

Investors have to complete the KYC form in two parts. Part I requires personal information to be provided and proof of address and identity given along with self-attested supporting documents. Additional information required by an intermediary is provided in Part II. The information for KYC is uploaded by the intermediary onto the system provided by a centralized agency called the KYC Registration Agency (KRA).

12.4.1 eKYC

eKYC is a paper-less Aadhaar based process for fulfilling KYC requirement... eKYC completely eliminates paperwork and IPV to complete the KYC process.

Government of India has notified various reporting entities (approved by UIDAI and SEBI) as a KYC User Agency (KUA) to accept investor's Aadhaar number and complete KYC Verification with one-time password (OTP). These registered KUAs can further allow SEBI registered intermediaries and mutual fund distributors as sub-KUA to undertake Aadhaar authentication of their clients.

What the investor needs: Aadhaar number, PAN number and personal details such as mobile number and email-id, registered with UIDAI. Mobile number is mandatory. He can authenticate himself by receiving OTP on the registered mobile number. PAN of such client is to be verified from the income tax website.

The OTP limit: SEBI has provided guidance to restrict investments to Rs. 50,000 per annum per MF and payment for the same is made through electronic transfer from the client's bank account registered with that Mutual Fund for OTP based KYC. However, in case of investments greater that Rs. 50,000 per annum per MF, the investor needs to do IPV or biometric-based authentication.

When IPV is not required: IPV/ Video IPV would not be required when the KYC of the investor is completed using the Aadhaar authentication / verification of UIDAI · and when the KYC form has been submitted online, documents have been provided through Digi locker or any other source which could be verified online.

Digital KYC for persons with disabilities

The Hon'ble Supreme Court of India in a judgement dated April 30, 2025, emphasized the need for easy access to financial services for persons with disabilities. Thus, RTAs must ensure that the process of digital KYC is accessible to persons with disabilities.

An account can be opened with the signature of a guardian; eKYC is available for persons with disabilities.

eKYC requires the applicant to blink his / her eyes as proof of liveliness. A blind person who cannot perform this "proof of liveliness test" should not be denied benefits of eKYC. For such investors, intermediaries may use alternate parameters such as facial expressions, nodding of head, client showing OTP while being clearly visible on screen, real time video recording and displaying copies of documents on the screen etc.

Online KYC facilities

eSign service can facilitate an Aadhaar holder to forward the KYC documents after digitally signing the same. The eSign mechanism of Aadhaar shall be accepted in lieu of wet signature on the documents provided by the investor. Even the cropped signature affixed on the online KYC form under eSign shall also be accepted as valid signature.

Investor's KYC can be completed through online / App based KYC, in-person verification through video, online submission of Officially Valid Document (OVD) / other documents under eSign.

12.4.2 KYC Registration Agencies

KYC once completed, is valid across mutual funds and all the other SEBI-registered intermediaries (i.e. across capital market). KYC information is maintained by KYC Registration Agencies (KRA). SEBI has mandated that KRAs to share data and information with other KRAs through inter-operability process (IOP) and in turn to all SEBI registered intermediaries (SRIs)... Further KRAs may share information with other market regulators such as RBI, IRDAI, PFRDA if the respective regulators notifies so.

KRAs shall validate the clients' details through (a) UIDAI for Aadhaar, (b) OTP for mobile number and email id (wherever quoted by the investor) or based on successful delivery status of Email/SMS and (c) Income Tax database for PAN.

Three validation sources.

PAN is used as KYC identifier and the same may be used by the clients for account opening with any other intermediary, without repeating the KYC process. Provided KYC is completed using Aadhaar as OVD. If all KYC attributes gets validated, KYC status will be updated as KYC Validated.

In case of Non-Aadhaar is used as OVD, since Name and address could not be validated against source data, KYC status for such records will be KYC Registered and can transact only with the existing Funds.

On PAN–Aadhaar linkage: PAN-Aadhaar linkage is disconnected from ascertaining the KYC status. Clients in whose case, PAN Aadhaar linkage are not found to be verified, shall be allowed to transact with the existing intermediary subject to valid PAN, however the client's KYC shall not be allowed portability in securities market.

As a part of the Risk Management framework, KRAs shall verify PAN, Name and Address within the prescribed time of receipt of the relevant records from the investor. Additionally, the KRA shall verify the mobile number and email ID. Clients whose details cannot be verified will not be allowed to transact further until the details are duly verified.

12.4.3 Central KYC Registry

Vide Notification dated November 26, 2015, the Government of India authorised the Central Registry of Securitisation and Asset Reconstruction and Security Interest of India (CERSAI) to act as and to perform the functions of the Central KYC Registry (CKYCR) under the PML Rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in digital form of all the clients in the financial sector.

To get CKYC done, one may approach a financial intermediary regulated by RBI, SEBI, IRDAI or PFRDA like a bank, a NBFC, a stock broker, AMC, a distributor or an Insurance company.

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... Also, the registered intermediaries should upload KYC records pertaining to the accounts of the individuals opened prior to August 1, 2016, as and when updated KYC information is received from the clients.

For legal entities: SEBI has further rolled out the implementation of CKYCR for Legal Entity (LE) accounts opened on or after April 2021, with earlier accounts uploaded when the updated KYC information is obtained/received from the client.

CKYCR shall process the KYC records received from a reporting entity for de-duplication and issue a unique KYC Identifier for each client... Where an investor submits a KYC Identifier to a registered intermediary, providing consent to download records from CKYCR, then such intermediary shall retrieve the KYC records online from CKYCR using the KYC Identifier and the investor shall not be required to submit the same KYC records.

12.4.4 DigiLocker

SEBI aims to reduce Unclaimed Assets in the Indian securities market through greater use of Digi Locker facility. Currently, Digi Locker is used mostly for one time storage of documents such as PAN Card, driving license etc. It is proposed that the DigiLocker facility may also be used for storage of documents that are updated regularly such as account holding statement of mutual funds, consolidated account statements issued by depositories. Nominees of a Digi Locker facility will receive an SMS and email notification on the demise of the investor.

The seventh sample question tests this — DigiLocker is for digital storage and retrieval of investor documents.

RTAs have a key role in transmission of investments on the demise of an investor. Adoption of DigiLocker facility will ease the transmission process for both the RTA and the Nominees.

12.5 Power of Attorney

Individual investors can empower someone they trust to do transactions on their behalf. This is done by executing a Power of Attorney (PoA). This facility is mostly used by NRIs who are unable to manage their investments while staying in a foreign country.

Since minors cannot enter into valid contracts, there is no question of a PoA for a minor. The guardian plays a role similar to a PoA holder acting on behalf of the minor.

A Power of Attorney (PoA) has two parties – the grantor who is the primary investor who grants the rights; and the Attorney (or holder of PoA) who is authorised to execute an agreed set of actions on behalf of the grantor.

PoA holders usually exercise all the rights of an investor in a mutual fund. They have to be compliant with the requirements of PAN and KYC. 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. The rights of the PoA holder are defined in the PoA.

The grantor's signature is recorded in the folio for purposes of verification. The grantor can continue to operate the account even after giving a PoA.

12.6 Nomination

Mutual fund investors can nominate someone to receive the investment proceeds in the event of their death or Opt out of Nomination. 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.

In case of death of an investor, the MF will transmit the units in favour of the nominee. 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.

Maximum three nominees, totalling 100 per cent.

Only individual investors can make a nomination. Investments by minors cannot have a nomination. 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.

The fourth sample question tests the last of those — a Power of Attorney holder cannot be a nominee.

AMCs and RTAs are expected to encourage investors to complete the "choice of nomination" by sending a communication on fortnightly basis and pop-up message can be displayed where nomination is not made or opt-out declaration not submitted.

In addition to folio-level nominations, investors may also consider registering on DigiLocker and specifying DigiLocker nominee(s). DigiLocker nomination does not override or replace the legal nominee in the folio or demat account.

12.7 FATCA and CRS compliance

Mutual Fund investors, including guardians, whose country of birth/ citizenship/ nationality/ tax residency is other than India, are required to furnish additional information under Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS). The information that is required is:

Place/ City of Birth, Country of Birth, Country of Citizenship/ Nationality

Is the investor's Tax Residency/ Country of Birth/ Citizenship/ Nationality other than India (Yes or No) — If yes, indicate all countries in which the investor is resident for tax purposes and the associated Tax ID number (Details of Country of Tax Residency and Tax Payer Reference ID).

12.8 The Investor Charter

SEBI has issued separate investor charters for each of its registered intermediaries, including mutual funds and RTAs. The investor charters detail out the services provided to investors, rights of investors, various activities of MFs/RTAs with timelines, and the Grievance Redressal Mechanism.

Rights of investors — six

1. Right to receive information and details about the scheme including about its investment philosophy, risk profile, portfolio holdings, fees, charges and expenses... to enable investors to make an informed decision... prior to making any such investment.

2. Right to timely receipt of statements/ reports such as account statements, Consolidated Account Statement (CAS), Annual report / abridged annual report etc.

3. Right to timely disclosure of daily Net Asset Values (NAV), Portfolio and Performance of each scheme including scheme's AUM, investment objective, expense ratios on the mutual fund website.

4. Right to timely receipt of redemption proceeds/ dividend (IDCW) payments/ refunds, as applicable.

5. Right to be notified about any change in the fundamental attributes (features) of a mutual fund scheme in which the investor has investments and to be provided a right to exit the scheme without cost, if so desired.

6. Right to timely redressal of grievances and complaints and right to escalate unresolved complaints to the SCORES portal.

Responsibilities of investors — fourteen

To read all scheme related documents and understand the scheme features and the risks involved · to provide and keep updated KYC details including address, tax status, residency, and other key information such as PAN & bank account details · to provide own email address and mobile number · to check Account Statement & Consolidated Account Statements for discrepancy... and promptly bring any such discrepancies to the notice of the Asset Management Company · to read communications/ notices/ addendums/ press releases · to consider availing facility to nominate · to invest through registered and regulated entities and not to invest based on speculation, rumour or informal advice · to keep confidential critical information such as user ID, password · to invest by issuing payments in the name of the Mutual fund/ scheme only and not in the name of any other entity · to protect oneself by not issuing blank cheques or blank signed transaction instructions · to avoid using third-party bank accounts for fund flows · to ensure that correct and complete Bank details are recorded with RTA · to ensure that the documents provided... are complete in all respects and keep copies · to not deal with unauthorized persons for any investor service requests.

The fifth sample question draws on three of these — checking statements for discrepancies, considering nomination, and paying only in the fund's name are all responsibilities.

12.9 Reporting the demise of an investor

SEBI has mandated a centralised mechanism for reporting the demise of an investor through KRAs. Once a KRA or other intermediary receives notification of the death of an investor, they are required to obtain the death certificate and PAN of the deceased and verify the same. The verification may be through the website of the issuing authority or in OSV (original seen and verified) mode.

After verification of the details, the intermediary shall submit a KYC modification request and block for debit all folios of the deceased investor. Joint accounts or E or S accounts shall be allowed to operate as per the original mandate.

The chapter's sample questions confirm that Overseas Corporate Bodies may not invest; that companies, partnership firms, associations of persons, societies and trusts are all institutional investors; that a minor's transaction uses the guardian's PAN; that a Power of Attorney holder cannot be a nominee; that checking statements, considering nomination and paying only in the fund's name are all investor responsibilities; that unclaimed dividends and redemption amounts go to the Investor Education and Protection Fund; that DigiLocker is for digital storage and retrieval of investor documents; that an electricity bill older than three months is not an officially valid document; and that the composite PAN-exempt limit is Rs. 50,000.