BANKING OPERATIONS IN MUTUAL FUNDS

Banking Operations in Mutual Funds (Part 1)

• Payment Mechanism: Payments for mutual fund transactions must be made through approved banking channels, including online transactions, cheques, demand drafts, and cash.
• Modes of Payment: Acceptable modes of payment include:
  • Electronic/Online mode
  • Physical cheque mode
  • Cash Payments (with limitations)
  • E-Wallets (with limitations)
• Electronic/Online Payments: Includes:
  • National Electronic Funds Transfer (NEFT): A nation-wide payment system for electronic fund transfers.
  • Real Time Gross Settlement (RTGS): A facility for instant electronic fund transfers, used for transactions above Rs 2 lakhs.
  • Auto Debit and Standing Instructions (SI): Allows investors to set up automatic payments for systematic investment plans.
  • Application Supported by Blocked Amount (ASBA): A payment facility for mutual fund NFOs, where the investor blocks the required amount in their bank account.
  • E-Wallet: A virtual wallet for making payments, with certain conditions and limitations.
• Physical Payments: Includes:
  • Cheque: A payment instrument that differs in terms of fund collection, with types such as transfer cheques, local cheques, and outstation cheques.
  • Demand Drafts: Accepted in cases where mutual funds cannot reach investors in certain locations.
• Cash Payments: Investors can invest in mutual funds through cash, up to Rs 50,000 per investor per mutual fund per financial year, with certain conditions.
• Third Party Verification (TPV) and Payment to Valid Account: RTAs are required to validate transactions and ensure that investment amounts are accepted through modes with independent traceability of the end investor.
• Key Requirements:
  • Validation of transactions through penny drop facility, PAN-based account validation, or original cancelled cheque.
  • Ensuring independent traceability of the end investor and source account details.
  • Providing bank account number, remitter name, and other details for one-time mandate (OTM) transactions.
  • Permitting payments only from banks that provide real-time account validation or source bank account information.
  • Rejecting subscription transactions from unverified bank accounts and refunding the amount.
  • Providing detailed information at each stage of the transaction and access to relevant documentations for audits.

BANKING OPERATIONS IN MUTUAL FUNDS (Part 2)

• Authentication: Two-factor authentication is required for subscription transactions, including SIP and other recurring transactions, as per SEBI regulations.
• Bank Accounts: A mutual fund scheme maintains several bank accounts, including:
  • Collection Accounts: Receive investments from investors.
  • Investment Accounts: Settled by the custodian bank for securities transactions.
  • Redemption Accounts: Funded to pay out investors.
  • Expense Accounts: Meet regular fund running expenses.
• Cash Management Service (CMS): Enables mutual funds to efficiently use their cash balances, provided by banks.
• Collecting Bankers: Appointed by a mutual fund scheme to collect payment instruments, which are then deposited into the collecting bank account.
• Electronic Clearing Mechanisms: Include:
  • National Automated Clearing House (NACH): A centralized clearing system for high-volume electronic transactions, replacing Electronic Clearing Service (ECS).
  • Cheque Truncation System (CTS): An RBI project for faster clearing of cheques by sending electronic images instead of physical cheques.
• Role of Registrars and Transfer Agents (RTAs): Play a crucial role in banking operations, including:
  • Reconciling receipt of funds with applications.
  • Highlighting discrepancies in electronic payments.
  • Ensuring units are not issued in case of cheque return or mismatch.
• Adoption of Standardised, Validated and Exclusive UPI IDs: Aimed at enhancing accessibility and safety in the securities market by offering a structured UPI option for investors, with verified UPI IDs linked to validated bank accounts.
• Responsibilities of the Registrar: Include creating investor awareness about UPI payment handles and "SEBI Check" functionality, as well as creating educational content for investors.
• Payment Modes: Accepted payment modes for investing in a mutual fund include:
  • Bank Transfer: A common method for investing in mutual funds.
  • Demand Draft: A valid payment instrument for mutual fund investments.
  • UPI: A popular and convenient mode of money transfer, with standardized and exclusive UPI IDs being adopted for payment collection.
  • NEFT: A widely used electronic payment mode for mutual fund investments.
  • RTGS: A fund transfer method that moves funds instantaneously, often used for large transactions.
  • Cash Deposit: Acceptable for mutual fund investments, but subject to certain limits and regulations.