Check out cheque rules

Information about precautions to be taken while writing out cheques when investing in mutual funds and the changes in rules pertaining to these instruments need to be well understood to ensure a smooth investment process.

While investing in mutual funds, bank details for receiving payout (dividend and redemption) must be provided in the application form. The cheque submitted along with the application may be from the same account mentioned in the application form for receiving payouts.

In case the fresh subscription cheque is not from the account mentioned in the application form, investors would have to provide valid documentary proof for the payout bank details, i.e. the bank account mentioned in the application form. This can be an original cancelled cheque having the first holder’s name printed therein.

Any kind of changes or correction on cheques is not permitted without a counter signature. If there is any change in the payee’s name, amount in figures or amount in words, investors will have to write a fresh cheque.

When applying for mutual fund units, care should be taken while filling out the cheque. The cheque amount in words and figures should tally and match with the amount in the application form. The investment amount should be at least for the minimum amount mentioned in the scheme documents.

The name of the fund and the scheme should be correctly mentioned on the cheque. Care should also be taken to ensure that the scheme option mentioned in the cheque and the application form are the same.

In line with the RBI notification, validity of all cheques, drafts, pay orders and banker’s cheques is three months from the date of issue of the instrument. Investors must ensure that all dividend or redemption payments received through cheques are presented to their banks within this timeframe.

According to AMFI guidelines, mutual fund investments made through third party cheques will not be processed. A cheque issued by and signed by any person other than the first holder of the investment is a third party cheque.

When a payment is made from a bank account that is not held by the beneficiary investor, that is, the First Holder or the Sole Holder, it is referred to as a ‘Third Party Payment’. If the cheque is issued from a joint account, the first named applicant/investor must be one of the joint holders of the bank account from which the instrument is issued.

There are exceptions to this rule as spelt out below:

Parents : Payment may be made by parents/grandparents/related persons on behalf of a minor for a value not exceeding Rs 50,000 (each regular purchase or per SIP instalment)

Employers : Payment may be made by employers on behalf of employees under the Systematic Investment Plans through payroll deductions.

Custodians : Payments made by custodians on behalf of FIIs or clients.

Such applications should be accompanied by the third party declaration form mentioning the relationship with the First Holder. The form is available at mutual fund Web sites.

Payments made by pre-funded instruments, such as a pay order or banker’s cheque will be accepted if the instrument is accompanied with a certificate from the issuing banker stating the account holder’s name and the account number which has been debited for issue of the instrument.

The account holder’s name mentioned in the certificate should be that of the first holder.

Alternately, investors may submit a copy of the bank statement evidencing the debit for the issuance of the instrument or a copy of the acknowledgement from the bank wherein the instructions to debit the bank account are available.

These should contain the bank account details and the name of the investor. The account number mentioned in these supporting documents should be the same as one of the registered bank accounts in the folio or mentioned in the application form.

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