NISM V-A Chapter 9 Notes: Investor Services – Key Concepts & Exam Prep Guide

• Mutual funds are collective investment vehicles for many investors. 
• Standardizing processes and services ensures a consistent investor experience. 
• This standardization helps investors understand what services to expect or not expect. 
• The discussion will focus on investor services at different stages of a mutual fund investment. 

The NFO Process : 

• NFO Definition: A New Fund Offer (NFO) is the first-time offering of units in a mutual fund scheme to investors. 
• Scheme Planning: The AMC decides on launching a scheme based on investment and market input from CIO and CMO. 
• Category Restrictions: An AMC can launch a scheme only in a permissible category, ensuring no duplication unless allowed. 
• Documentation: The Scheme Information Document (SID) is prepared, approved by Trustees and BoD, and submitted to SEBI. 
• Marketing and Distribution: The AMC plans publicity, events, and distributes scheme documents and forms to intermediaries. 
• Key Dates (Open-ended): 
• NFO Open Date: Start of investment period. 
• NFO Close Date: End of investment period. 
• Scheme Re-opening Date: Start of ongoing sale/re-purchase. 
• Close-ended Schemes: No re-opening date; units traded on the stock exchange. 
• SEBI Guidelines: 
• NFO must remain open for 3–15 working days. 
• Units must be allotted or money refunded within 5 business days of closure. 
• Open-ended schemes must re-open within 5 business days after allotment. 

New Fund Offer Price/On-going Offer Price for subscription : 

• NFO Price: The price per unit investors pay during the New Fund Offer. 
• Ongoing Offer Price: The price at which investors buy, redeem, or switch units after the NFO period. 

Investment Plans and Services : 

• Direct vs Regular Plans: 
• Investors can choose to invest directly with the AMC (Direct Plan) or via a distributor (Regular Plan). 
• Direct Plans have lower expense ratios (TER) as they exclude distribution commissions. 
• Both plans have different NAVs and cannot be interchanged based on expense ratio alone. 
• Mutual Fund Options: 
• Three options are offered: 
  a) Income Distribution cum Capital Withdrawal (Payout) 
  b) Income Distribution cum Capital Withdrawal (Reinvestment) 
  c) Growth Option 
• These have identical portfolios but differ in cash flow structure, unit count, and taxation. 
• Payout Option: 
• Dividends are paid out to investors; NAV drops post payout. 
• No change in unit count; dividends are taxable. 
• Reinvestment Option: 
• Dividends are reinvested in the scheme at the ex-dividend NAV; units increase accordingly. 
• Dividends are taxable. 
• Growth Option: 
• No dividend declared or paid; NAV fully reflects portfolio growth. 
• Units remain constant; no immediate taxation unless units are sold. 
• Illustration Summary: 
• Three investors in different options receive equal total returns of Rs. 200 but through different mechanisms (capital gains vs dividends). 
• Post-tax returns vary depending on tax treatment of capital gains and dividends. 

Allotment of Units to the Investor : 

• NFO Units are sold at a face value of Rs. 10, and units are allotted in full to valid applications if the scheme’s minimum subscription is met. 
• Allotment is completed within 5 business days; demat holders receive units in 2 working days. 
• FPI allotments may need RBI approval. Non-demat investors receive account statements within 5 business days. 
• ASBA applicants’ accounts are debited upon allotment intimation. 
• Ongoing offers use the applicable NAV (sale price); units = investment ÷ NAV. 
• Rights issues have pre-fixed prices but are rare in mutual funds. 
• Bonus issues offer free units (e.g., 1:3 ratio); NAV adjusts proportionally without changing total value. 
• Rejected applications are refunded within 5 business days, with 15% p.a. interest if delayed. 
• Demat-held units are transferable as per ASBA application details. 

Account statements for investments : 

• Monthly Statement: Issued if transactions occur during the month; includes transaction value, NAV, units transacted, and closing balance. 
• Annual Statement: Sent to investors with no transactions in the last six months; shows latest unit balance and value. 
• Soft Copy Option: If mandated, annual statements may be sent via email instead of physical copy. 
• Consolidated Account Statement (CAS): Issued monthly if a financial transaction took place; sent by email/post based on SEBI rules and PAN availability. 
• CAS for Inactive Folios: Sent every six months (March/September) for folios with no activity, showing holdings across all mutual funds. 

Mutual Fund Investors : 

• Individual Investors eligible to invest include: 
• Resident Indian adults (alone or jointly, max three). 
• Minors, through a guardian; payment must come from a linked account. 
• Hindu Undivided Families (HUFs), with the Karta investing on behalf of the family. 
• NRIs/PIOs, can invest on a repatriable or non-repatriable basis, with PIO/OCI card. 
• Foreign investors (QFIs) from FATF-compliant countries can invest via demat or UCR. 
• Non-individual Investors include: 
• Companies, societies, trusts, banks, financial institutions, SEBI-registered mutual funds. 
• FPIs, multilateral agencies, defense units, research and educational institutions. 
• Investment Routes: 
• Foreign investors can invest directly via demat or indirectly via Unit Confirmation Receipt (UCR). 
• Scheme-specific Eligibility: 
• Some schemes restrict eligibility to specific investor categories (e.g., Gilt schemes). 
• Always refer to the “Who can Invest?” section of the Scheme Information Document (SID). 

Filling the Application Form for Mutual Funds : 

• Direct vs. Regular Plan: Investors can invest directly (mentioning “Direct” in the ARN field) or through a distributor (providing ARN/RIA details). 
• Unit Holder Information: Up to three holders allowed; the first holder is primary and receives all benefits. Full KYC and personal details are required. 
• Minor as Holder: Investment on behalf of a minor must be through a guardian with KYC; no joint holders allowed. Upon maturity, the minor must update KYC and bank details. 
• Power of Attorney (PoA): Requires KYC and PAN for both grantor and holder; PoA holder can’t make or change nominations. 
• Status and Mode of Holding: Must specify individual/non-individual status and holding mode (single/joint/either or survivor); default mode applies if unspecified. 
• KYC and FATCA/CRS: KYC proof and details about occupation, income, and tax residency (FATCA/CRS) are mandatory. 
• Bank Details: First holder’s bank info is compulsory. Additional documents required if the payout account differs from the payment account. 
• Investment Details: Scheme, plan (direct/regular), and options (growth/dividend) must be selected; defaults apply if unspecified. 
• Payment Details: Payment instrument info and relevant bank account must be provided; folio or application number should be noted on the payment. 
• Unit Holding Mode: Units can be held in physical or demat form. For demat, investor details must match depository records. 
• Nomination: Up to three nominees allowed. For single holders, nomination or opt-out declaration is mandatory per SEBI rules (effective Sept 30, 2023). 
• Minimum Investment: Must meet scheme-specific minimum limits as per SID/KIM. All holders must sign the application. 

Financial Transactions With Mutual Funds : 

• Initial Purchase: 
• Units can be bought during a New Fund Offer (NFO) or in an open-ended scheme. 
• Requires a completed application form, necessary documents, and payment. 
• Forms are available at AMCs, distributors, ISCs, or online. 
• Existing investors can use their folio number to avoid resubmitting personal data. 
• Additional Purchases: 
• Investors with an existing folio can invest using a transaction slip or application form. 
• Information in the folio overrides any conflicting data in the form. 
• Must meet the minimum investment requirement. 
• Redemption (Repurchase): 
• Investors can redeem units in open-ended schemes via a transaction slip or through a Depository Participant (DP) for demat units. 
• Redemptions use FIFO method and are subject to Exit Load and NAV. 
• If folio balance falls below minimum, the folio may be closed. 
• Switch Transactions: 
• A switch is a simultaneous redemption from one scheme and purchase into another. 
• Regulatory Requirements: Payments for mutual fund (MF) purchases must be through approved banking channels—online, cheques, DDs, or limited cash—ensuring traceability. 
• Online Transactions: Investors can use internet banking via login credentials; Two-Factor Authentication (2FA) is mandated by SEBI for safety. 
• Digital Payment Modes: Include Internet Banking (NEFT, RTGS, IMPS), UPI (with VPA setup), and NACH (for automated recurring transactions like SIPs). 
• Mobile and Alternate Platforms: M-Banking, stock exchange, and MFU platforms allow MF purchases via smartphones and web apps. 
• ASBA Facility: Enables blocking of funds in investor accounts during NFOs; funds are debited only upon allotment. 
• AEPS and NUUP: Use Aadhaar-linked accounts or basic mobile phones (via *99#) for transactions without the internet. 
• Cards and E-Wallets: Debit and prepaid cards are allowed; credit cards are not. E-Wallets have a ₹50,000 annual limit per investor per MF and must comply with KYC norms. 
• One-Time Mandate (OTM): Allows automatic debits from investor bank accounts for MF purchases; useful for SIPs and regular transactions. 
• Physical Instruments: Cheques/DDs are accepted with investor and scheme details; must be local, not post-dated or stale, and third-party payments are generally not allowed unless exceptions apply. 
• Cash Payments: Permitted up to ₹50,000/year per investor, only for resident individuals with KYC compliance, submitted physically at designated bank branches. 

• Payment Mechanism for Repurchase of Units : 
• Cheque Payments: Traditional method with delayed processing due to multiple steps like dispatch, deposit, and clearing. 
• Electronic Modes: Faster alternatives (e.g., Direct Credit, RTGS, NEFT, NACH) require correct bank details and may not be available to all investors. 
• Redemption Proceeds: Paid to the sole/first holder; if in demat form, credited to the bank account registered with the depository. 
• NRI Investors: Payments made in INR; repatriation costs borne by the investor; proceeds may be credited to NRE/FCNR accounts with applicable TDS. 
• Multiple Bank Accounts: Investors can register multiple accounts (5 for individuals, 10 for non-individuals), with one marked as default. 
• Bank Account Consistency: NRO/NRE consistency must be maintained between investment source and redemption account. 
• Change in Credit Account: Allowed only to pre-registered accounts; else, payment goes to default account. 
• Instant Access Facility (IAF): Available only in liquid schemes; allows same-day credit up to ₹50,000 or 90% of investment value (whichever is lower). 

Cut-off Time and Time Stamping : 

• NAV Applicability & Cut-off Timings: NAV for mutual fund transactions is based on SEBI-prescribed cut-off times to ensure fairness, varying by fund type and transaction type. 
• Equity & Debt Funds (except liquid/overnight): 

• Purchase/Switch-in: NAV of the day funds are available before 3:00 PM without using credit. 
• Redemption/Switch-out: Same-day NAV if submitted before 3:00 PM; otherwise, next business day NAV. 
• Liquid & Overnight Funds: 

• Purchase/Switch-in: 
• Before 1:30 PM with available funds → previous day’s NAV. 
• After cut-off → NAV of the day before the next business day. 
• Redemption/Switch-out: 
• Before 3:00 PM → previous day’s NAV. 
• IAF redemptions follow lower NAV of applicable days. 

• Special Cases: NAV applicability depends on actual fund realization time and business days, illustrated with practical date-based examples. 
• Time Stamping Process: 

• Only time at the Official Point of Acceptance (OPoA) counts. 
• Machines are tamper-proof and stamped with location code, serial number, date, and time. 
• Online transaction time is based on the receiving web server’s clock. 

KYC Requirements for Mutual Fund Investors : 

• KYC is mandatory for all mutual fund investors (individuals, NRIs, joint holders, minors, PoA holders, etc.), regardless of investment amount, for all types of transactions. 
• Required Documents: 
• PAN card is mandatory (except specific exempt categories). 
• Proof of address (e.g., passport, utility bill). 
• Exempt investors (e.g., Micro-SIP ≤ ₹50,000/year) can submit alternate photo ID. 
• Exempt Categories from PAN: 
• Central/State government transactions, Sikkim residents, UN entities, and investments up to ₹50,000/year per fund. 
• Centralized KYC (cKYC): 
• Once done with any SEBI intermediary, valid across the capital market. 
• CERSAI manages the centralized KYC Registry and issues unique KYC identifiers. 
• e-KYC via Aadhaar: 
• UIDAI’s e-KYC is valid; intermediaries must be registered as KUAs/sub-KUAs. 
• Online verification includes OTP, PAN, Aadhaar, bank API, etc. 
• In-Person Verification (IPV): 
• Mandatory; done by SEBI-registered intermediaries, bank managers, or notary. 
• Online KYC: 
• Enabled via apps/websites using eSign, DigiLocker, Aadhaar OTP, etc. 
• Minor Investors: 
• Guardian must complete KYC and submit proof of minor’s age. 
• NRIs & PoA Holders: 
• NRIs require PAN, passport/PIO/OCI card, and overseas address proof. 
• Both investor and PoA holder must complete KYC separately. 
• Institutional Investors: 
• Need documents proving investment eligibility, board resolutions, UBO disclosure (ownership >25% for companies, >15% for trusts/partnerships). 

Systematic Transactions : 

• Systematic Transactions help investors automate investments, withdrawals, and transfers, aligning with financial goals and reducing manual intervention. 
• Systematic Investment Plan (SIP) involves investing a fixed amount at regular intervals, allowing Rupee Cost Averaging—buying more units when prices are low and fewer when high. 
• SIPs are suitable for volatile markets, help build discipline, and can be started with lower amounts using tools like PDCs, NACH, or Standing Instructions. 
• Systematic Withdrawal Plan (SWP) allows fixed periodic redemptions, reducing risk of full redemption at market lows; taxes and exit loads apply. 
• SWP can be fixed or variable (based on appreciation), useful for liquidity, regular income, and profit-booking. 
• Systematic Transfer Plan (STP) shifts funds periodically from one scheme (source) to another (target), combining features of SIP and SWP; suitable for portfolio rebalancing and phased investing. 
• STP avoids idle funds and paperwork delays, though exit loads and taxes apply on source scheme redemptions. 
• Switch is a one-time combined redemption and reinvestment transaction between two schemes. 
• Dividend Transfer Plan (DTP) enables transferring dividends from one scheme to another within the same fund, aiding diversification and rebalancing; specific conditions and rules apply. 

Operational aspects of Systematic Transactions : 

• Systematic Transaction Options: Mutual funds offer SIPs, SWPs, STPs, and triggers with predefined schemes, minimum investments, and allowed dates/frequencies. 
• SIP Registration: 
• New investors submit both application and SIP forms; existing investors only submit SIP enrollment forms. 
• Forms must include scheme, SIP details, PAN, KYC, bank info, and matching signatures. 
• SIP Processing: 
• Registration typically takes 15–30 days; first instalment timing depends on form submission date and mandate status. 
• Payment modes include post-dated cheques and electronic options like NACH, direct debit, and SI. 
• SIP Top-Up Facility: 
• Allows periodic increase in SIP amount (fixed or % basis). 
• Investors can set an upper limit or end date for top-up. 
• May not apply to Micro-SIPs exceeding ₹50,000 annually. 
• SIP Renewal & Cancellation: 
• Requires a form with full SIP details. 
• Can be cancelled by notifying the AMC and bank, or due to insufficient funds. 
• SWP & STP Registration: 
• Requires selection of schemes, amounts, and frequency. 
• Mutual funds define minimum amounts and require advance notice for registration or cancellation. 
• Switches: 
• Involve moving funds between schemes using transaction slips with full details. 
• Units go under the same folio as the source scheme. 
• Execution Rules: 
• Transactions executed at applicable NAVs; taxes and loads apply. 
• Can be cancelled anytime with written notice. 
• Trigger Facility: 
• Automates actions like redemption, switch, or investment based on market or NAV conditions. 
• One-time use; extinguishes after activation. 
• Requires prior registration and is scheme-specific. 

Non-Financial Transactions in Mutual Funds : 

• Nomination: 
• Investors can nominate up to 3 individuals; percentage shares must total 100%. 
• Required in single-holder folios unless explicitly declined. 
• Joint holders must all sign; only individuals (not trusts, firms, or POA holders) can nominate. 
• Nomination can be updated or cancelled; changes override previous ones. 
• Pledge/Lien of Units: 
• Units can be pledged as loan collateral using a pledge form signed by all holders. 
• Units under lien cannot be sold/redeemed without pledgee consent. 
• Income distributions may go to lender or holder as per agreement. 
• Demat Account: 
• Investors can hold mutual fund units in dematerialized (digital) form. 
• Requires a demat account with a DP; eliminates paperwork and centralizes holdings. 
• KYC with one capital market intermediary is sufficient. 
• Incorrect data leads to processing in physical mode instead of demat. 
• Change in Folio Details: 
• Personal/KYC-related changes go through KRA using change forms with proof. 
• Bank account changes are made directly with the AMC; up to 5 (individuals) or 10 (non-individuals) accounts can be registered. 
• Transmission of Units: 
• On death of the holder, units are transferred based on nomination/joint holding/legal succession. 
• Requires death certificate, KYC of claimant, and indemnity. 
• SEBI mandates standard forms and documents for transmission. 

Change in Status of Special Investor Categories : 

• Special Investor Categories like minors, NRIs, and HUFs require extra documentation due to unique taxation and investment rules. 
• Minor to Major Transition: 
• Transactions are frozen when a minor attains majority. 
• KYC, PAN re-submission, new bank account, and demat account opening are mandatory. 
• All standing instructions (SIP, SWP, STP) stop until status change is processed. 
• MAM form and documents (PAN, KYC, cancelled cheque, signature attestation, etc.) must be submitted. 
• NRI to Resident Indian: 
• NRE/NRO/FCNR accounts must be closed and replaced with a Resident Rupee Account. 
• A new resident demat account must be opened; old NRI account is closed after transfer. 
• Mutual fund status must be updated with KYC and bank details. 
• Change in HUF Karta: 
• Requires a letter from the new Karta, KYC documents, death certificate of previous Karta, bank certificate, and an indemnity bond from all co-parceners. 

Investor transactions – turnaround times : 

• NAV Disclosure: Net Asset Value must be calculated and disclosed daily. 
• Subscription Period: Mutual fund schemes (excluding ELSS IPOs) must stay open for a maximum of 15 days. 
• Allotment/Refund: Units must be allotted or money refunded within 5 business days post-NFO closure. 
• Scheme Re-opening: Ongoing sale/re-purchase of open-ended schemes must resume within 5 business days after allotment. 
• Dividend/Redemption Proceeds: Must be transferred to unitholders within the SEBI-specified time or interest must be paid for delays. 
• Reports & Statements: 
• Annual Report Summary: To be sent within 4 months of financial year-end. 
• Portfolio Statement: Sent within 10 days of each half-year’s close. 
• Unaudited Results: Published within 1 month of half-year end (excl. debt/money market schemes). 
• Debt & Money Market Details: Disclosed daily with a 15-day lag. 
• Consolidated Account Statement (CAS): Sent monthly and half-yearly as per SEBI timelines. 
• Unit Certificates: Issued within 5 working days of request (2 days for demat in close-ended schemes). 
• SIP/STP/SWP Accounts: Statement or demat units issued within 5 days of subscription closure or application receipt. 
• Additional Services: Include online investment tracking, portfolio reports, tax-related data, and monthly updates to dormant investors.