Investment in mutual funds is considered one of the best investment decisions for an ordinary investor looking to book capital gains in future. Also, since they have long term horizon of 5-15 years with guaranteed financial security, mutual fund transferability is an important process.
Many people intend to gift mutual fund units to their closed ones as a token of love or even bequeath it to their loved ones after demise. However, there are certain complexities involved in this transferability process. Let’s explore the feasibility and technicalities associated with gifting or transferring mutual funds to another owner.
Transfer or Transmission
Units of a mutual fund are transferred to a surviving member in case of an untimely demise of the first holder, it is known as ‘transmission’ of mutual funds. On the other hand, a ‘transfer’ is said to happen when all the unit holders are alive.
Transfer of mutual funds is a grey area since as per the Securities and Exchange Board of India’s (SEBI) regulations, 1996, transfer of mutual fund units is allowed. However, the fund houses don’t allow all the unit holders to transfer their units, en masse. The argument presented by them is that since these mutual fund units could be easily sold and liquidated, there is ‘no point’ transferring funds.
Transfer of mutual fund units from one holder to another is quite rare. So the concept of gifting mutual fund units also is a hypothetical one and is practically not possible. In fact ‘third party’ payments are not accepted by mutual funds – meaning one can’t use ones spouse’s money to make investment in your name or vice versa. This might seem circuitous but this is the only process one needs to follow in case one wishes to transfer mutual fund units.
So if you want units to be in a relative’s name, then you need to transfer money first to the receiver’s account and then you can use that amount to invest in the fund by their name. The only scenario in which mutual fund units can be transferred to another is in case of the demise of the unit holder. This is usually in favour of a joint holder or a legal nominee to whom the transmission of mutual fund unit takes place.
Legal Documents Needed
In case of a nominee staking a claim to investment, the fund house asks for a set of legal documents.
As per SEBI’s circular, one would need letter from a joint holder or a nominee (in case there is no joint holder). Also needed would be the death certificate of the deceased unit holder, the Know-your-client documents of the nominee. One would also need the bank account mandate to get nominee’s bank account registered, instead of the one that is already existent or the one belonging to the deceased unit holder. These documents might range from an indemnity bond if the invested amount exceeds Rs. 1 lakh to an affidavit by the legal heir.
Consider a real life scenario for rule clarity and tax implications:
John’s wife buys mutual funds from her savings. She then transfers it to John immediately. Can this happen and will there be any tax implications on this as the mutual funds are being given to John?
Explanation: The scenario mentioned above is not practically possible because since MFs can’t be transferred from one holder to another. Also, they can’t be gifted by one person to another. For John’s wife to execute this operation she would have to first transfer cash to John’s account (or an account in which John and his wife are joint holders). She can then use that amount to invest in a fund in John’s name.
Hence, mutual funds cannot be transferred from one holder, nor are you allowed to do any third-party payment.