Process for investing in mutual funds
PAN & KYC norms
- SEBI’s regulations prescribe various categories of investors who are eligible to invest in a mutual fund in India. It includes resident individuals, NRIs, PIOs, Foreign nationals and Institutions.
- All investors in mutual funds must have a Permanent Account Number (PAN) that needs to be provided at the time of applying for units.
- Institutions and Eligible investors in a mutual fund have to undergo a ‘Know Your Customer’ procedure prescribed by SEBI to be eligible for investing in mutual funds.
- KYC is done once at the time of the first mutual fund transaction or any other capital market transaction. KYC is valid across mutual funds and other capital market intermediaries.
- The KYC procedure may be conducted by an AMC or any other authorized entity. It involves collecting information about the investor in the specified format and conducting an In-Person Verification (IPV) to verify identity, address and other personal information.
Investing in a New Fund Offer (NFO): Units of a mutual fund are first available for investing when the scheme is launched in a New Fund Offer (NFO). These units are issued for first time, hence they are at face value. The application form for the NFO is available along with a document called the Key Information Memorandum (KIM). KIM provides the important information about the scheme and procedures for investing. The NFO will be open for a period of 15 days during which the investor has to make the application. Payment for the units can be made only through cheque and online payment facilities like NEFT and RTGS. A folio is created for each investor under which the investor’s personal information such as name, status, address, PAN, bank account details and investment information is captured. The units will be allotted to investors within 5 days of the NFO period coming to an end. The account statement giving details of the units allotted will be sent to the investor.
Investing in the Continuous Offer: In an open ended fund, units are sold after the NFO period. It is called continuous offer. Investors can buy units at any time and not just during a specific period. The price of units in the continuous offer depends on the NAV of the fund, and is declared for every business day. New investors use the application form to invest in a fund on continuous offer. Existing investors invest using a transaction slip which requires only the folio number to be provided to identify the investor, apart from the investment details. Investors submit the completed application form or transaction slip and the payment instrument at an Official Point of Acceptance (OPoA). This could be the office of the AMC or an Investor Service Centre (ISC). Information on units allotted is communicated to the investor through a Statement of Account (SoA).
Stock exchange channel: Both purchase and redemption/sale of units can be done using the stock exchange through the stock brokers who have obtained an AMFI Registration Number (ARN) and certified mutual fund distributors who have obtained the necessary permission from the stock exchange. The units need to be held in dematerialised form to enable transactions through this channel. Units will be credited to the investor’s demat account for any purchase and funds will be credited to their bank account for any redemption.
Payment Instruments: Investors can make payments for investments in mutual funds using cheques and electronic payment modes such as NEFT, REGSS. Payments must be made from a bank account whose account holder is the first holder of the mutual fund folio. Cash upto Rs. 50,000 per mutual fund house is permitted as payment for purchases. Demand draft is accepted as payment instrument only in specific situations.
Redemptions: Redemption refers to encashing or withdrawing the investment made in a mutual fund by selling the units back to the mutual fund. Investments made in an open-ended fund can be redeemed at any time at the current applicable NAV. Units of a closed-ended fund can be redeemed only when the fund matures. Investors need to specify either amount or units at the time of redemption. The applicable NAV is adjusted for any exit loads before calculating the redemption amount. For example:
- Units redeemed 500
- Applicable NAV: Rs. 24
- Exit load: 1% OF NAV = Rs. 24 x 1%= 0.24
- Adjusted Nav= Applicable Nav – Exit load= Rs. 24 – 0.24
- Thus Adjusted NAV= Rs. 23.76
- Redemption Amount: 500 x Rs. 23.76 = Rs. 11880
SEBI has made it mandatory for investors to provide their bank account details. Mutual funds acquire bank details at the time of purchase. Redemptions are either made directly into the bank account, or by cheque. To avoid fraudulent encashment of redemption cheque, bank account details are pre-printed on the cheque.
Proof of Investment and Transaction:
- Statement of Accounts: Statement of account (SoA) is the proof of the investment made by the investor in a mutual fund. On behalf of mutual funds, the R&T agents dispatch a SoA after every transaction. A consolidated SoA across mutual fund holdings is sent to the investor for each calendar month where there have been transactions in a folio. Folios where no transactions have taken place during a six-month period will receive a statement at the end of such six-month period. A SoA is sent when an investor makes a fresh purchase transaction. The amount, price, and units are shown in the statement. For subsequent transactions, apart from these details, the balance units in the folio and their current market value are also shown.
- Units in Demat form: Investors can also hold the units in demat form. Both new and existing(already issued) units will be credited to their account. Purchases and sale of units held in this form are done through a stock broker. The investor will have to bear the demat account cost and security transaction cost for such transactions through the broker.
Distributor commission: Mutual funds pay an upfront commission to distributors who source investments from investors. Mutual funds also pay a trail commission which is based on the period for which the investment brought in remains with the fund and is a percentage of the current value of the investments. This means as long as the investor remains in the fund, the distributors receive commission on these investment. It is paid periodically to distributors and represents a steady source of income. Investors can directly pay a commission to the distributor, known as advisory fees. SEBI’s regulations allow a transaction charge to be paid to the distributor out of the money invested by the investor.