1. What are the benefits of Mutual Funds?
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 a long-term horizon of 5-15 years with guaranteed financial security, mutual fund transferability is an important process.
We shall explore the feasibility and technicalities associated with gifting or transferring mutual funds to another owner.
2. 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 unitholders are alive.
a) 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 unitholders 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.
b) 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 an investment in their own 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 unitholder. This is usually in favor of a joint holder or a legal nominee to whom the transmission of mutual fund unit takes place.
3. What are the 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 a 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 unitholder, 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 unitholder. 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 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.
4. Starting a SIP for a Minor
If you are looking at Mutual Funds to create a fund for your child, then it’s better that you start when they are a minor. You can buy MF units in the name of your children and choose the SIP scheme, whereby payments will be made into the account until your child reaches majority.
The minor, i.e. your child, would be the first and the sole holder of the account and no joint holders are permitted under this scheme. You will act as a guardian until your kid reaches 18 years of age. The AMC will send across a document before the date on which your child attains maturity. This document will act as a de facto application for changing the account for ‘minor’ to ‘major’ status. Post this, the guardian will not be allowed to operate the account anymore. Some other documentation like KYC etc. will also be required for the process to be complete. Your child will then be able to reap the benefits of the MF investments you have made on their behalf.
5. SWP for Senior Citizens
Our parents have looked after us all their lives, and if you want to do something nice for them then look no further than investing in MF schemes with a monthly interest payment facility.
So, instead of waiting for a transfer or transmission of your MF units, why not invest in a SIP/SWP scheme for your children or your parents which will be more effective in the long run? If you need any more help with investing in MF, our experts will be pleased to help!