Table of Contents
Chapter 13: Banking Operations in Mutual Funds
Chapter 13: Banking Operations in Mutual Funds
Learning Objectives
After studying this chapter, you should understand:
- Modern payment mechanisms utilized in mutual funds: Electronic Mandates, NACH, and UPI.
- Mandatory Third-Party Verification (TPV) rules and statutory anti-money laundering controls.
- Bank account architecture maintained by mutual funds (Collection, Operating, Dividend, and Redemption accounts).
- Role of RTAs in daily banking reconciliations and electronic fund settlement.
- Implementation of standardized, validated, and exclusive UPI IDs.
13.1 Electronic Payment Mechanisms
Mutual fund transactions operate almost entirely on electronic clearing interfaces:
- Unified Payments Interface (UPI): Instant 24/7 bank transfers up to ₹5,00,000 per transaction with real-time mandate authorization.
- National Automated Clearing House (NACH) / e-Mandate: Operates automated recurring debit instructions for Systematic Investment Plans (SIPs).
- NEFT / RTGS: High-value gross settlement transfers for institutional and corporate subscriptions.
13.2 Third-Party Verification (TPV) Rules
To comply with the Prevention of Money Laundering Act (PMLA) and prevent financial fraud, SEBI enforces strict Third-Party Payment Verification (TPV) rules:
[!IMPORTANT] Core TPV Rule: Mutual funds can ONLY accept subscription payments made from the bank account of the investor (first holder). Payments originating from a bank account belonging to any third party are strictly rejected!
┌─────────────────────────────────────────────────────────────────┐
│ PERMITTED EXCEPTIONS TO THE TPV BAN │
├─────────────────────────────────────────────────────────────────┤
│ 1. Parents / Grandparents paying on behalf of a MINOR for an │
│ aggregate investment not exceeding ₹50,000 per transaction. │
├─────────────────────────────────────────────────────────────────┤
│ 2. Employers making investments on behalf of employees through │
│ payroll deductions or bonus contributions. │
├─────────────────────────────────────────────────────────────────┤
│ 3. Custodians making investments on behalf of an FPI or client. │
├─────────────────────────────────────────────────────────────────┤
│ 4. Asset Management Companies paying distributor commissions. │
└─────────────────────────────────────────────────────────────────┘
Verification Evidence Required
Investors must attach proof that the payment account belongs to them:
- Pre-printed cancelled cheque leaf bearing the investor’s name;
- Bank passbook with photograph and account details; or
- Bank statement certified by bank officials.
13.3 Bank Account Hierarchy Maintained by Mutual Funds
To ring-fence cash flows and comply with SEBI regulations, each mutual fund scheme operates distinct bank accounts:
┌───────────────────────────────────────┬────────────────────────────────────────────────────────┐
│ BANK ACCOUNT TYPE │ PURPOSE & REGULATORY FUNCTION │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Scheme Collection Account │ Dedicated to receiving subscription money from │
│ │ investors. Funds remain here until units are allotted. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Scheme Operating Account │ Used by the AMC/Custodian to buy and sell securities, │
│ │ settle trades, and pay brokerages. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ IDCW / Dividend Payout Account │ Funded with dividend payout amounts; dedicated to │
│ │ electronic transfer of dividends to unit holders. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Redemption Payout Account │ Dedicated to electronic transfer of redemption │
│ │ proceeds directly to unit holders' bank accounts. │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Unclaimed Dividend / Redemption Acc │ Ring-fenced account holding unclaimed proceeds; │
│ │ deployed only in call money or liquid schemes. │
└───────────────────────────────────────┴────────────────────────────────────────────────────────┘
Chapter Summary & Exam Cheat Sheet
- TPV Core Principle: Subscription payments accepted ONLY from investor's own verified bank account.
- TPV Minor Exception: Parents/grandparents can pay for a minor up to ₹50,000.
- TPV Other Exceptions: Employer payroll deduction, Custodian for FPI, and AMC for commission.
- Bank Proof: Cancelled cheque leaf with pre-printed name, certified passbook, or bank statement.
- Account Segregation: Distinct Scheme Collection, Operating, Dividend, and Redemption accounts.
- Unclaimed Funds Deployment: Can be deployed only in money market instruments or specialized liquid funds.