Mutual funds have been a staple of the investment portfolio for millions of investors. Even in the face of market volatility, quality funds have managed to provide decent returns to their investors and have become a good source of passive income as well. Mutual funds cannot be transferred from one unitholder to another other than by way of redemption and subsequent subscription. However, mutual funds can be passed on in the form of inheritance. For this, it is crucial that the unitholder provide due nomination at the time of subscription or at a later date.
SEBI has recently brought an amendment in the nomination rules for mutual funds on June 15 2022 which are set to be implemented from 1st August 2022. Given below is a brief discussion of the said amendment and its implications for the investors.
What is nomination in mutual funds?
The nomination facility in mutual funds allows the unit holder to nominate a person who may or may not be a relative or a legal heir. Such a person is entitled to claim the units of mutual funds bestowed upon them after the demise of the original unitholder. In case the mutual fund units are jointly held by more than one unitholder, all the unit holders are required to nominate a person jointly who would be entitled to receive the units in the event of death of all joint holders.
Who is qualified to be a nominee?
The guidelines of SEBI have specifically mentioned who can and cannot be a nominee for the mutual fund units. A nominee can be any person including a minor who may or may not be a relative or a legal heir. In case the nominee is a minor, details regarding the name and address of their guardian need to be provided. An NRI can also be a nominee subject to the provisions of the prevalent exchange control. A person can also nominate the Central Government, State Government, or local authority.
The guidelines disqualify the following entities to be included in the nomination of a mutual fund.
- Trust (other than a religious trust or a charitable trust)
- A society
- A company or a body corporate
- A partnership firm
What is the latest nomination rule by SEBI?
SEBI under its amendment dated June 15th, 2022, announced that all the existing, as well as new investors, will have a choice to provide a nomination for the mutual fund units held by them or opt out of the nomination facility altogether. This option will come into effect from 1st August 2022 for all the existing as well as new mutual funds and their unit holders.
As per this option, unitholders will have to provide a due nomination for the units held by them or select the opt-out option by the end of 31st March 2023. SEBI has laid down the format for both the options which have to be rolled out by the mutual fund houses upon selection by the unitholders.
SEBI has directed the AMCs to provide online as well as an offline facility for the unitholders to execute their choice of option. Mutual fund unitholders can submit their nomination or the choice to opt-out in the specified format either with the fund houses, registrar, or the transfer agents within the due date specified for the same. Unitholders opting for the online format to execute their selected option can use an e-Sign option to complete the process or send a scanned copy of the duly signed relevant form at the above-mentioned options.
What are the consequences of non-compliance with this rule?
SEBI guidelines further state the consequences of not opting for any option by the end of the deadline mentioned in the amendment. Unitholders who fail to opt for either the nomination facility or the option to opt-out of nomination by the end of 31 March 2023, will see a freeze on their mutual fund folios. Such investors will therefore not be able to sell the mutual fund units in their folios after 31st March 2023. This rule is applicable to all the mutual fund units whether held jointly or having a single unit holder across all the mutual funds available in the market.
The nomination facility of the mutual funds is the only way to pass on mutual fund units from one unitholder to another without going through the route of redemption. Therefore it is important for every mutual fund holder to enlist their nominees if they wish to pass on their holdings through inheritance. However, earlier, mutual fund unitholders did not have the option to opt-out of nomination. This new amendment provides them with such an option, however, the unit holders have to select either option within the due date to avoid any hassles of unfreezing their folios post the deadline set by SEBI.
Yes. A unitholder can nominate multiple nominees specifying the share of each such nominee in the nomination form.
Yes. Unitholders can change the nomination for their units multiple times during their lifetime.
If no option is selected by the unitholders till the due date mentioned by SEBI, their folios will be frozen which implies that they will not be able to sell any units from their folios after the due date.
The due date as per SEBI for selecting the option to nominate or the option to opt-out of nomination is 31st March 2023.
Yes. SEBI has directed the AMCs to provide online and offline facilities for selecting the option to nominate or opt-out of nomination and send the duly signed forms for the same in the prescribed format.