New rules aiming... wef August 1, 2022

Investors subscribing to mutual funds on or after August 1, 2022 need to specify

New rules aiming... wef August 1, 2022

New rules aiming to secure the online mutual fund transactions

The capital market regulator Securities and Exchange Board of India (SEBI) have always implemented rules and regulations in order to protect and empower the investors’, prevent fraud and also bring in the transparency in the mutual fund operations. Effective from July 1, 2022 certain key rules are mandated by SEBI are discontinuation of usage of pool accounts for transactions in mutual funds by online platforms, stockbrokers or distributors. In addition, need for a two-factor authentication to complete all types of mutual fund transaction including redemption, switch, systematic withdrawal, transfer and new nomination rules. Let us understand in detail about these new norms.  

Prohibition of the mutual fund investments from the pool account

From July 1, 2022 mutual fund investments cannot be initiated from a pool account. The money should go directly from the investor's bank account to the bank account of the mutual fund house. And in case of redemption the sales proceeds should go directly to an investor's account. SEBI has ruled that no online platform, stock broker, mutual fund distributor or investment advisor accumulates money from investors in pool account and then transfers it to the fund house to buy units for investors.

The rule aims to prevent misuse of the funds and comes amid the backdrop of several complains such as failing SIP transactions, delay in allotment of units to investors.  Earlier the stock broker who had taken mandate from investors about their SIP transaction wherein money used to get debited from pool account and invested in mutual fund scheme will stop now.  Investor will create new mandate through their broker in favour of Clearing Corporation of India. Investors also need to simultaneously cancel their existing mandate. For lump sum investor, money which was earlier transferred via Real Time Gross Settlement (RTGS)/ National Electronic Funds Transfer (NEFT) to the online platform or stock broker will now be invested through Clearing Corporation of India.  Similarly in case of any redemption the money will now not come to pool account but will get credited directly to investors’ bank account.

Two factor authentication is must for all transactions including sale of units

Verification of the all the digital transactions is mandatory using 2 FA (factor authentication). Hence, it is crucial for investors to update their mobile and email id since an OTP will be triggered to email and mobile number that is registered in folios with the mutual fund companies. Investor need to enter the OTP to proceed with the redemption. If the OTP is not provided redemption will not get processed. Investors can update their contact details on the mutual fund website and also ensure their KYC is updated with their latest records. For investors who are not tech savvy they can seek the help of the distributor, fund house to update all the relevant KYC details.

Nomination updation for mutual fund holders

Investors subscribing to mutual funds on or after August 1, 2022 need to specify a nominee or submit a signed declaration to opt out of nomination. The same needs to be done by the existing investor as well. The deadline for filing of nomination is March 31, 2023 failing which the folios will be frozen for debits.  All the asset management companies (AMCs) need to ensure that option to update or opt out of nomination is provided to investors and ensure all necessary steps are taken to maintain confidentiality and safety of client records. Investors need to check their nomination status and avoid the last-minute rush. Filling up nomination is crucial as in event of the death of the investment holder the process of transfer of asset to the nominee is smoother.  In event of no nomination details provided by investors, legal heirs of the person have to submit proofs and go through longer process to acquire right over the investments.

Summing up

Execution of new norms could be troublesome for all the stakeholders where there could be some glitches and for investors to get adopted to the new ways. However, these measures are taken to ensure safety in the mutual fund transactions and prevent fraud. Investors need to alert of the all the mails, SMS to do the relevant updation and ensure their investment continues. Seek the help from the advisor, distributor and fund house whenever needed.  While the regulator from time to time plays its role to provide a safer future; investors should be vigilant and keep a track of their investments and do the necessary escalations.  Investors also need to keep their KYC records to prevent any inconvenience while investing.