Table of Contents
Chapter 12: Investors in Mutual Funds
Chapter 12: Investors in Mutual Funds
Learning Objectives
After studying this chapter, you should understand:
- Categories of investors eligible to invest in Indian mutual funds (Individuals, Minors, HUFs, Corporates, Trusts, NRIs, FPIs).
- Statutory documentation requirements and mandatory PAN verification.
- The Know Your Customer (KYC) framework under PMLA, 2002: CKYCR, KRAs, In-Person Verification (IPV), and Video KYC (V-CIP).
- Legal provisions governing Nominations (Form SH-13) and the consequences of nomination.
- Foreign tax compliance: FATCA (US) and CRS (OECD) disclosures.
- The centralized protocol for Reporting the Demise of an Investor.
12.1 Eligible Investor Categories
Mutual funds accept investments from diverse legal entities:
- Resident Individuals: Single or joint accounts (up to 3 holders on "Anyone or Survivor" or "Joint" basis).
- Minors: Must invest through a natural guardian (father/mother) or court-appointed legal guardian. No joint holders permitted.
- Hindu Undivided Families (HUFs): Invest through the Karta.
- Non-Resident Indians (NRIs) / OCIs: Invest through Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank accounts on a repatriable or non-repatriable basis.
- Institutional Investors: Public and private limited companies, Partnership Firms, Limited Liability Partnerships (LLPs), Registered Trusts, Societies, and SEBI-registered Foreign Portfolio Investors (FPIs).
12.2 KYC Architecture & Regulatory Verification
Under the Prevention of Money Laundering Act, 2002 (PMLA) and SEBI guidelines, completing KYC is a mandatory prerequisite before investing in mutual funds:
┌───────────────────────────────────────┬────────────────────────────────────────────────────────┐
│ KYC COMPONENT │ OPERATIONAL MANDATE & PROCESS FLOW │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Central KYC Registry (CKYCR) │ Centralized repository managing KYC records across all │
│ │ financial sectors (SEBI, RBI, IRDAI, PFRDA); assigns a │
│ │ unique **14-digit KYC Identifier Number (KIN)**. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ KYC Registration Agencies (KRAs) │ SEBI-registered agencies (CVL, NDML, DotEx, CAMS, │
│ │ Karvy) maintaining centralized securities KYC records. │
│ │ "KYC Once Completed is Valid Across All Intermediaries"│
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ In-Person Verification (IPV) │ Mandatory physical verification of original identity │
│ │ documents by authorized RTA or distributor staff. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Video KYC (V-CIP) │ Fully digital onboarding via real-time live video, │
│ │ facial match algorithms, geo-tagging, and dynamic OTP. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Aadhaar e-KYC │ Digital OTP-based Aadhaar authentication; capped at an │
│ │ investment limit of **₹50,000 per financial year**. │
└───────────────────────────────────────┴────────────────────────────────────────────────────────┘
[!NOTE] PAN Exemption (Micro-SIPs): PAN is mandatory for all mutual fund investments. The only exception is Micro-SIPs / Micro-investments, where investments up to ₹50,000 per year per investor across all schemes of an AMC are exempt from PAN requirements (investor must complete PAN-exempt KYC with photo ID).
12.3 Nomination Framework
- Mandatory Requirement: All individual unit holders must either nominate beneficiaries or submit a formal declaration to "Opt-Out" of nomination.
- Multiple Nominees: Investors can nominate up to 3 nominees and must specify the exact percentage allocation to each (must sum to 100%).
- Minor Nominee: A minor can be appointed as a nominee provided the name and address of an adult guardian is specified.
- Legal Superiority: Under mutual fund regulations, payment of unit proceeds to a registered nominee provides a valid discharge to the AMC and RTA.
12.4 FATCA & CRS Compliance
- FATCA (Foreign Account Tax Compliance Act): US legislation requiring foreign financial institutions to report accounts held by US taxpayers to the US Internal Revenue Service (IRS).
- CRS (Common Reporting Standard): OECD global multilateral framework for the automatic exchange of financial account information.
- Investors must declare their Country of Tax Residence, Tax Identification Number (TIN), and citizenship status in the mutual fund application form.
12.5 Centralised Mechanism for Reporting the Demise of an Investor
SEBI established a centralized portal system allowing legal heirs or relatives to report the death of an investor once:
- Intimation submitted to one intermediary (e.g., KRA or RTA like CAMS/KFintech) automatically updates the status across all mutual fund AMCs and depositories.
- Demat accounts and folios are placed on immediate debit block to prevent fraudulent withdrawals while informing claimants of required transmission documents.
Chapter Summary & Exam Cheat Sheet
- Minor Accounts: No joint holders allowed; natural or legal guardian operates account until majority.
- PAN Exemption: Micro-SIPs up to ₹50,000 per financial year per mutual fund are exempt from PAN.
- CKYCR Identifier: 14-digit KYC Identifier Number (KIN).
- Aadhaar OTP e-KYC Limit: Maximum investment of ₹50,000 per financial year.
- Nomination Limit: Up to 3 nominees with pre-defined percentage allocations totalling 100%.
- FATCA/CRS: Mandatory declaration of foreign tax residency and Tax Identification Number (TIN).