Relooking at MF nomination after SEBI’s latest guidelines

While making new investments, investors are often in a hurry to complete the procedure and thereby overlook important aspects such as nomination. Little do they know that this lapse can force their family to move from pillar to post to claim the same investments when the original investor dies. As on March 2021, the amount lying unclaimed with mutual funds (MFs) was a whopping ₹1,590 crore. To address this issue, market regulator SEBI, just a few days ago, brought out a circular specifying new norms regarding the MF nomination process with an aim to standardise it. Let us have a detailed look.

New norms

From August 1, asset management companies (AMCs) should provide those putting in fresh money in MFs with the choice of either providing nomination for their investments, or opt out of nomination by signing a declaration form.

For existing investors, March 31, 2023, is the deadline for completing the nomination process, failing which their accounts will be frozen for debits and investors will not be able to redeem their investments.

Investors can either fill a physical nomination form with their own signature or use e-Sign facility for online option. SEBI has directed all AMCs to ensure that adequate systems are in place for providing the e-Sign facility and all necessary steps taken to maintain confidentiality and safety of client records.

Investors need not wait for the AMC’s direction for nomination. Platforms such as MFCentral also allow them to complete the process online.

Portfolio podcast | Why should you take Mutual Fund nomination seriously  Portfolio podcast | Why should you take Mutual Fund nomination seriously  

Nominee basics

Nomination enables MF unit-holder(s) to propose a person, who can claim the units, or the redemption proceeds, in the event of death of the unit-holder. In case of a joint MF account, each unit-holder’s approval is required for nomination. A nominee acts as a custodian (caretaker) of the asset in the event of death of the investor (original owner). A maximum of three nominees can be appointed. A minor is also allowed to be appointed as nominee; but in that case, a guardian also has be appointed. Each nominee can be assigned any percentage of the investment. Where there is no such such specification, each nominee shall be assigned equal portion of investment. Changes in nomination can be made at any point in time. Nomination can also be made in favour of the Central Government, State Government, a local authority, any person designated by virtue of his/her office or a religious or charitable trust. Do note a company/body corporate, partnership firm, Hindu Undivided Family (HUF), society or a trust (other than a religious or charitable trust) can’t become a nominee.

Do remember that becoming a nominee won’t necessarily give the ownership of the MF units in case the original investor dies. In case of a conflict of ownership, the Will shall be considered the final deciding factor and would supersede any nomination. Fund houses may transmit units to the nominee upon the investor’s death, but if the nominee(s) and the legal heir(s) are different and there’s dispute on ownership, the matter has to be resolved in court.

Points to note

Investors need not wait for AMC’s direction for nomination

Becoming a nominee won’t give ownership of MF units

In the absence of a nominee, MF units shall be transferred to legal heir but process could be lengthy

Why it is important

In the absence of a nominee, MF units shall be transferred to the legal heir as mentioned in the Will by the deceased owner. But the whole process could be lengthy, costly and cumbersome. In case a nomination is made, the nominee shall complete the formalities such as KYC process, submission of documents. These include proof of death of the unit-holder, signature of the nominee duly attested, proof of guardianship in case the nominee is a minor, and any such document required for transmitting the units in favour of the nominee(s). Nomination makes the whole process a lot smoother and eases the transmission of units without much of a legal hassle.

Claim process scenarios

There are three types of claimants — joint MF account holders, nominee(s) or legal heirs.

In case of a joint MF account, after the death of the first holder, MF units shall be transferred to the other surviving holder(s). If the demise of all holders of joint account takes place, units can either be transferred to the nominee(s) or to the legal heirs if nomination is not made.

In case of a single MF account, the units shall be transferred to the nominee, or to the legal heir if there is no nominee. If nomination details are available, then one has to furnish letter from claimant requesting transmission, notarised death certificate copy, Aadhaar card, PAN card etc.  Where nomination has not been done, additional documents such as indemnity bond(s) signed by legal heir(s), individual affidavit(s) by legal heir(s) and notarised copy of probated Will or copy of succession certificate, among others, have also to be submitted. The above procedures can vary if the transmission amount is more than ₹2 lakh. .

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