How Does SEBI’s Circular on Nomination Impact Mutual Fund Investors

June 22, 2022 Mutual Fund

SEBI has come out with a circular to bring uniformity of practices in case of nomination in mutual funds. From August 01, 2022, new investors in mutual funds will have the choice of either providing nomination or opting out of the nomination by signing a declaration form.

For existing investors (holding units solely or jointly), SEBI has asked mutual fund houses to set March 31, 2023 as a deadline for either adding a nominee or opting out of the nomination. Failing to comply with this provision will result in the freezing of folios for sell transactions.

Mutual fund houses will provide an option to submit the nomination form or the declaration form for opting out of nomination either physically or online as per the choice of the unitholders. In the case of physical option, the forms should carry the wet signature of all the unitholders. In the case of online option, the forms will use the e-sign facility recognised under the Information Technology Act, 2000, instead of the wet signature of all the unit holders.

Furthermore, mutual fund houses have to ensure that adequate systems are in place for providing the e-sign facility and take all necessary steps to maintain the confidentiality and safety of client records.

Should you opt for nomination?

Nomination is a vital process which allows smooth transmission of mutual fund units to the right claimant after the death of the unitholder without any legal hassles. A nominee can be any person that you trust the most – spouse, children, friend, etc.

In the case of mutual fund units held jointly, the units get transferred to the surviving holder. However, in the case of sole unitholder, if the nominee detail is not available, the heir/beneficiary will have to go through a lengthy process to get the units transmitted.

Therefore, it is highly advisable to add nomination details for your mutual fund investment whether or not it is mandated by the market regulator. At present, most mutual fund houses do not allow the creation of new folios in single holding mode without nomination.

You can have up to 3 nominees in one mutual fund folio and can specify the percentage share that each nominee will receive. You can even nominate a minor as a beneficiary by providing the name and address of the guardian of the minor nominee.

In case you do not have a nomination in your existing investment, or if you wish to add/modify nominee details, you can get it done either through the mutual fund house or Registrar & Transfer Agents (RTAs). Do note that any fresh nomination request will override the existing one.

Another important aspect to note is that a nominee is merely a custodian of assets who has to ensure that the money gets passed on to the legal heir. A nominee cannot supersede the rights of the legal heir. Hence, it is preferable to appoint a nominee who will eventually become your legal heir or is the beneficiary of the Will as per the applicable succession law.

This article first appeared on PersonalFN here