Mutual Fund: The Securities and Exchange Board of India (SEBI) has provided a major relief to mutual fund investors. Under new regulations, the requirement for a demat account to transfer mutual fund units from one individual to another has been removed. This move will significantly facilitate millions of investors who hold their holdings in a Statement of Account (SoA), or non-demat mode. This decision will make it much easier for investors to gift units to family members, add a close relative’s name, or resolve legal succession matters.
Why was this change necessary?
Investing in mutual funds isn’t just about making money; it’s often part of family financial planning. There are many times in life when investors need to transfer their units to someone else. SEBI has simplified regulations to address these practical needs.
For example, investors often want to gift their units to their children or spouse. Furthermore, the unfortunate demise of a unit holder previously created numerous complications. For example, if a folio had two joint holders and one of them passed away, the surviving holder could now easily add another family member as a new joint holder.
Another major problem has been resolved. Often, the nominee in the folio would receive the units, but if the deceased also had other legal heirs, it was difficult for the nominee to transfer the units to them. Under the new rules, once the units are transmitted in the nominee’s name, they can later transfer them to other entitled beneficiaries. Similarly, when a minor investor turns 18, their folio converts to a major one. They can now add their parents or a sibling as joint holders in their folio.
Which schemes will the rules apply to?
This new SEBI circular applies to almost all mutual fund schemes. Investors can transfer units from any fund house’s scheme under this facility. However, there are two key exceptions. First, this facility will not apply to exchange-traded funds (ETFs), as they are traded through stock exchanges. Second, this rule will also not apply to solution-oriented schemes (such as children’s funds or retirement funds). This is primarily because these schemes have age-based eligibility criteria and a fixed lock-in period, which hinders the transfer process.
Eligibility-wise, all resident and non-resident (NRI) Indian investors holding units in the Statement of Account (SoA) mode can avail this facility. However, there are some important restrictions in the rules. Transfer of units from or to a minor’s folio is not permitted. Furthermore, transfer of units by a resident Indian to a non-resident Indian (NRI) account is also not permitted.
SEBI has made this entire process secure and completely digital. Investors don’t need to travel to transfer units; they can simply do so through the websites of registrars and transfer agents (RTAs) like CAMS, KFintech, or MF Central. The process is fairly straightforward. First, the transferor must log in to the RTA portal using their PAN number. There, they must select the scheme from which they wish to transfer the units and enter the details of the transferee.
To ensure security, consent from all unitholders in the folio is mandatory. This consent will be obtained through a one-time password (OTP) sent to the registered mobile number and email address of all holders. This process will be completed on a first-in, first-out (FIFO) basis, similar to redemption (selling units) or switch transactions in mutual funds.
Keep these important conditions in mind before transfer
To avail this facility, SEBI has also set some basic conditions that must be met. The first and most important condition is that the units being transferred must not be under any kind of lien, freeze, or lock-in. For example, if your units are in a tax-saving (ELSS) scheme and the 3-year lock-in period has not been completed, you cannot transfer them.
The second condition is that both the transferor and the transferee must have a valid folio with the same mutual fund house. If the transferee does not already have a folio with that fund house, they must open a ‘zero balance folio’ before initiating the transfer process. Furthermore, the KYC of both parties must be fully validated and verified.
Most importantly, the units cannot be sold immediately after transfer. Redemption of these units will not be permitted for 10 days from the date of transfer. This is a cooling-off period to help prevent any rash or misuse.