Mutual funds have gained huge popularity over the decades since they were launched in the Indian markets and have grown to be a staple in a person’s investment portfolio. The inherent benefits and flexibility of investment in mutual funds make them a very lucrative investment option when compared to the traditional investment options that our parents and grandparents had. The popularity of mutual funds has gained to such an extent that many have even thought to gift them to their loved ones. But it is possible? Can mutual funds be gifted or transferred from one person to another?
Given below are the answers to these questions.
What is a transfer of mutual funds?
Mutual funds are a bouquet of equities, debt, and other investment options all clubbed in a single fund depending on their investment objective and investment strategy. These funds have the benefit of multiple asset classes and have lower risks as compared to investments in pure equities.
The majority of the mutual funds in India are open-ended schemes where the investors can enter at any point and exit (subject to exit loads) depending on the market conditions and fulfillment of goals. However, this does not equate to the transfer of mutual funds.
A transfer or transmission of mutual funds is when the funds are transferred from one unit holder to another without any redemption in the market. This can be under only one situation when the mutual funds are inherited by the nominee of the unitholder upon the death of the latter. An essential requirement for this is including the name of the said nominee in the records of the AMC to facilitate the easy transfer of mutual fund units in such situations.
Understanding the Process of Transferring Mutual Funds
In the case of equity shares, the shareholder can transfer the share certificate in the favour of another person. However, the same is not possible for mutual funds. Therefore, they cannot be gifted to another person or entity or simply transferred in the name of another unitholder without passing through the open market. The only option to transfer the mutual fund units to a person other than through inheritance is by way of the seller selling the units in the open market and the intended buyer purchasing the same at the relevant market price.
Steps Involved in Transferring Mutual Funds
Here are the steps involved in transferring mutual funds:
- Log in to your mutual fund account and select the option to transfer funds.
- Enter the details of the mutual fund scheme you want to transfer from and the mutual fund scheme you want to transfer to.
- Enter the number of units you want to transfer.
- Check the exit load and other charges that may apply.
- Submit the transfer request.
- The transfer process will take a few days to complete.
Benefits of Transferring Mutual Funds
Some of the benefits of transferring mutual funds are:
- Switching to a better-performing scheme: Investors can transfer their units to a better-performing scheme if they are not happy with the performance of their current mutual fund scheme. This can help them improve their investment returns.
- Saving on taxes: Investors may be able to save on taxes if they transfer their units from a debt fund to an equity fund. This is because debt funds are taxed as per the investor’s income slab, while equity funds are taxed at a lower rate.
- Consolidating investments: Investors can transfer their units to a single scheme if they have multiple mutual fund schemes. This can help them simplify their investment portfolio and make it easier to track their performance.
- Changing investment goals: Investors can transfer their units to a scheme that is more aligned with their new goals if their investment goals change. This can help them stay on track and achieve their financial goals.
Considerations Before Transferring Mutual Funds
If a unitholder has not submitted nominee details in their mutual fund application form, their immediate next of kin will need to furnish a few documents to ascertain their claim and proceed with the transfer of mutual fund units. These documents would include the death certificate of the unitholder, personal KYC of the claimant, requisite fees if any as per the guidelines of the AMC, etc.
The regulations levied by SEBI do not allow mutual fund houses to accept any third-party contributions. This implies that the contribution for the mutual fund units should be from the account of the unit holder only. Therefore, if a person wants to buy mutual fund units in the name of their spouse or children, then they have to first transfer funds into their account and then make payment for the units from their own account.
Transfer of mutual fund units from one broker to another in the name of the same unit holder, however, is quite common and can be easily facilitated by filling the requisite form at both ends (account closure form with the previous broker and new account opening form with the new broker). The unitholder will have to clear all the dues of the previous broker to complete the transfer process.
Transfer fees and taxes
When transferring mutual funds, there may be transfer fees and taxes involved. The transfer fees are charged by the mutual fund company and are typically a percentage of the amount being transferred. The taxes that may be applicable depend on the type of mutual fund and the investor’s tax situation.
What does AMFI state?
The issue of transfer of mutual funds from one unit holder to another is quite ambiguous and may seem to have differing opinions under SEBI and AMFI. While SEBI states the mutual fund units cannot be transferred from one unit holder to another other than through inheritance, AMFI in its FAQs states that mutual funds units can be transferred from one unit holder to another through an off-market transaction provided they are held in the Demat form. Therefore, if the units are in the physical form they have to be first dematerialized and then can be transferred in the name of another unit holder.
When we look at the views of SEBI and AMFI together, it is clear that mutual fund units cannot be transferred from one unitholder to another directly other than in the nature of inheritance. Also, the units have to be in a dematerialized form for easy transfer of units.
Transfer of mutual fund units through a gift deed is not possible. Unitholders need to complete the nomination process correctly to ensure a smooth transfer of their holdings to their intended nominee or legal heir. The rules levied by SEBI and AMFI are to secure the interest of the investors and to ensure that there is no insider trading or undue transfer of securities that can be detrimental to the entire market system. Going against such rules will make the investors face severe penalties as per the guidelines of SEBI and AMFI.
No. Mutual fund units need to be held in a Demat form for transfer from one unit holder to another.
The regulating bodies for the transfer of mutual funds are SEBI and AMFI.
Yes. Transfer of mutual fund units from one broker to another can be easily done by paying the requisite fees and filling out the necessary forms at both ends.
If the nominee details are not provided at the time of purchasing the mutual fund units, the same can be provided at a later stage. If upon the death of the unitholder, the nominee details are still not available, the next of kin can claim the ownership of the units by providing necessary proof and documentation as per the guidelines of SEBI and AMFI> Some of the documents needed include,
-Death certificate of the deceased unitholder
-Document to provide evidence of the relationship between the deceased unitholder and the claimant
-KYC form for the claimant
-Succession certificate issued by a competent court in case of a dispute.