What is nomination in mutual fund schemes

What is Nomination?

Nomination is a process under which a unitholder of a mutual fund scheme nominates another person or more than one person (maximum three) to claim all the units in case of his/her demise. When there is a situation of units held by more than one-person i.e. held jointly, then all unit holders are asked to nominate a person to whom all the units would be transferred when all joint unit holders die. Nominating a person is recommended in Regulation 29 A of SEBI Mutual Funds Regulations, 1996 under fourth schedule.

Often people get confused between the nomination and Will and think that these can be substituted for one another but that is not true. Will provides the right to own the assets of a deceased person while nomination is just the transfer of assets to the nominee where nominee does not have the right to own those assets. In order to understand it better, let us take an example. Suppose there is an investor Mr. A who has invested in mutual fund schemes and he made his brother a nominee for all the units held by him in the portfolio. However, in his Will, he has made his wife a legal heir of mutual fund units. Unfortunately, he died, and, in this case, mutual fund house will transfer the money to the nominee i.e his brother who will only receive the money but is not entitled to own them. His brother will act as a trustee of the units and transfer the units to the legal heir i.e the wife of Mr. A. Mr A’s wife will be having the ownership of the units held in the portfolio. In case Mr. A has not made any Will then distribution of assets/units/money will be done as per the Indian Succession Act.

You may ponder on -- why do I need a nomination? My Will would supersede the nomination process. But the fact is that you need both for hassle free transfer of funds to the nominee/legal heir. Will ensures easy and smooth transfer of funds to the legal heir as per the wish of the deceased person while nomination will enable smooth transfer of mutual fund units to the nominee’s account. It would be beneficial if nominee and legal heir is same in order to avoid legal spat in future.

Why is nomination important?

Nomination is a very simple and inexpensive process to make things easy to one’s near and dear ones to claim the money invested by him/or her in mutual funds, demat account or bank account easily with minimal paperwork after his/her demise.

Imagine an investor has not made any nominee has invested in several different mutual fund schemes. On the account of untimely death of this person, the amount of efforts which will go into settling the funds will be tiresome. Nomination, therefore, is very crucial for smooth transferring of funds from deceased person’s account to the nominee account. In the absence of nomination, legal heir will have to go through cumbersome paper works for getting the settlement of funds.

Who have the right to nominate?

Nomination facility is available only to individuals. SEBI bars the Power of Attorney Holder to nominate. Parents investing in mutual fund units on behalf of a minor cannot nominate.

Who all can be nominated?

A unit holder can nominate family members, friends, and any other person who is trustworthy. Even a minor can be nominated to claim units in case of demise of a unitholder. However, parent of a minor will be the claim owner until the minor turns 18 years of age. There is also an option for the investors to choose multiple nominees and can decide the percentage of units that will be transferred to multiple nominees. It should be kept in mind that while making new nominations, old nomination will automatically get removed.

Who cannot be the nominee?

As per AMFI, the nominee can be any person or individual except trust (other than religious or charitable trust), society, company/corporate, partnership firm, Hindu Undivided Family (HUF) etc.,

The procedure of nomination

While subscribing the units of mutual funds schemes, mutual funds provide the form of nomination to the investors. Investors can furnish all the details asked in the nomination form. Investors have the option to nominate either at the time of initial purchase or in later period. Additionally, Unitholders can change the nominee any time. Legally, there is no cap on changing nominee. An investor can nominate maximum of three persons with clear allocation of units to each of them because if allocation is not clearly specified then AMC has the right to distribute money equally amongst the nominees. The nomination form is required to be signed by the investor. In case the units are held jointly, all unit holders will need to sign the nomination form, irrespective of the mode of operation of the account (i.e., whether by ‘jointly’ or ‘anyone or survivor’. Here is the standard Mutual Fund Nomination form

What is the procedure for units held in electronic (demat) mode?

In case the unit holder holds the mutual fund units in electronic (demat) mode with a depository, the nomination details given by the unit holder to the depository shall be applicable to the mutual fund units held in demat mode. Any such nominations including any variation, cancellation or substitution of nominee(s) will be governed by the rules and byelaws of the depository.

Process of getting money after the demise of a unitholder

Transmission of Units is a process through which units held by a deceased investor are transferred either to the nominee or to the legal heirs of the deceased investor.

In order to claim money after the death of a unitholder, the nominee must furnish the forms/formats and supporting documents as given below:

(1) Deletion of names of the deceased unit holders in case of death of 2nd and/or 3rd holder

i. Form T1 from surviving unit holder(s) requesting for deletion of name of deceased 2nd and/or 3rd holder.

ii. Death Certificate in original or photocopy duly attested by a Notary Public or a Gazetted Officer.

iii.KYC acknowledgement or KYC form of the surviving unit holder(s), if not KYC compliant.

(2) Transmission of units to surviving unit holder(s) in case of death

i. Form T2 for transmission of units to the surviving unitholders.

ii. Death Certificate in original or photocopy duly attested by a Notary Public or a Gazetted Officer.

iii. Copy of PAN of the surviving joint holder(s).

iv. Cancelled cheque of the new 1st unitholder with name pre-printed or bank statement or passbook that is not more than 3 months old.

v. KYC acknowledgement or KYC form of the surviving unit holder(s), if not KYC compliant.

(3) Transmission of units to the registered nominee(s) in case of death of sole or all unitholders

i. Form T3 for transmission of units in favor of the nominee(s).

ii. Death Certificate in original or photocopy duly attested by a Notary Public or a Gazetted Officer.

iii. Copy of Birth Certificate if in case the nominee is a minor.

iv. Copy of PAN Card of the nominee.

v. Copy of PAN card of the Guardian, if nominee is a minor.

vi. KYC acknowledgement or KYC form of the surviving unit holder(s), if not KYC compliant.

vii. Cancelled cheque with nominee’s name pre-printed or bank statement or passbook that is not more than 3 months old.

(4) Transmission of units to the claimant(s) on death of sole unitholder or all unitholders where there is no nomination registered

i. Form T3 for transmission of units in favor of the claimant(s).

ii. Death Certificate in original or photocopy duly attested by a Notary Public or a Gazetted Officer.

iii. Copy of Birth Certificate if in case the claimant is a minor.

iv. Copy of PAN Card of the claimant.

v. Copy of PAN card of the Guardian, if claimant is a minor.

vi. KYC acknowledgement or KYC form of the claimant.

vii. KYC acknowledgement or KYC form of the Guardian if claimant is a minor.

viii. Cancelled cheque with the claimant’s name pre-printed or bank statement or passbook that is not more than 3 months old.

Conclusion:

Nomination is an easy process to make things simpler for one’s family to claim the units in mutual fund schemes. It helps the claimant to avoid the cumbersome process of providing lots of documents like Will, legal heir certificate, NOC from other legal heirs in order to get the units transferred. Nomination is a simpler way of transferring money from demat account or bank account in a quick manner after the death of the unit holder.