What You Should Know About Mutual Fund Nomination

Investing in mutual funds offers you a simple and effective way to manage your money and improve your financial situation as an investor. However, there's a crucial aspect you might not have thought about: nomination. Nomination ensures that if anything  were to happen to you, your investments go to the right person smoothly. Throughout this article, we'll explore why nomination matters, how you can choose someone to receive your money, who can do it, and what you need to keep in mind.

What is Mutual Fund Nomination

Mutual fund nomination is a legal provision established by SEBI (Securities and Exchange Board of India) through Regulation 29 A of the SEBI Mutual Funds Regulations, 1996. It empowers individual investors (including sole proprietors) to designate a beneficiary who will inherit their mutual fund holdings upon their demise. This nominee can claim the units themselves or the proceeds from their redemption.

For joint holdings, the nomination process differs slightly. All joint holders must come together to nominate a single beneficiary. In the unfortunate event of all joint holders passing away, the investment rights will solely transfer to the nominated individual.

Why is Mutual Fund Nomination Important?

In the case where you haven't nominated a beneficiary for your mutual fund holdings, claiming these investments becomes a complex and potentially lengthy process for your loved ones on your passing away.

 Here's why nomination is crucial:

• Avoids Probate Delays: Without a nominee, your mutual fund units become part of your estate. Your legal heirs will need to obtain probate to claim them. This court-supervised process can be time-consuming (often taking months or even years) and involve significant legal fees.

• Simpler and Faster Claims: Nomination streamlines the inheritance process. Your designated nominee can claim your investments with minimal paperwork, following a set of formalities like KYC completion, proof of death, and nominee identification. This ensures your loved ones receive the funds quickly during a difficult time.

• Avoids Potential Disputes: In the absence of a clear nominee, there's a possibility of disputes among legal heirs regarding the rightful ownership of your mutual fund holdings. A nomination avoids such confusion and ensures your wishes are followed.

• Reduced Costs: Probate can be a significant financial burden on your family. Nomination eliminates this expense, allowing them to access your investments without additional financial strain.

By nominating a beneficiary, you take a proactive step to simplify the claim process and ensure your loved ones receive your mutual fund holdings efficiently and cost-effectively.

Who Can Nominate? And Who Can't?

Who Can Nominate: The power to nominate a beneficiary lies solely with individuals. This includes:

• Sole Holders: Investors holding mutual fund units in their single name can nominate a beneficiary.

Who Can't Nominate: Nomination is not applicable for situations where individuals don't hold units directly:

• Power of Attorney Holders: If someone holds units through a Power of Attorney (PoA), the PoA holder cannot nominate a beneficiary for those units.

• Guardians for Minors: Similarly, a guardian appointed to manage a minor's investments cannot nominate a beneficiary on the minor's behalf. This is because the guardian's role is temporary, and the minor has the right to manage their finances independently upon reaching adulthood.

Explanation for Guardians:

The law doesn't permit guardians to be nominees for a minor's account because, upon reaching adulthood, the minor has the sole discretion to manage their finances.  If a guardian were nominated, the minor wouldn't have control over their own investment after turning 18.

Who Can Be a Nominee? And Who Can't?

You have the flexibility to nominate almost anyone you trust, with a few exceptions:

Eligible Nominees:

• Individuals: You can nominate any individual you trust, including your spouse, children, parents, siblings, or even a close friend.

• Minors: Even a minor can be nominated. However, you'll need to provide the name and address of their legal guardian during the nomination process.

• NRIs: Non-Resident Indians (NRIs) can also be nominees, subject to prevailing foreign exchange regulations.

• Specific Entities: You can nominate the Central Government, State Government, a local authority, or a designated official. Religious and charitable trusts are also eligible nominees.

Ineligible Nominees: Indian law prohibits nominating certain entities:

• Non-Individual Entities: Companies, trusts (except religious/charitable trusts), partnership firms, Hindu Undivided Families (HUFs), and societies cannot be nominees.

How to Nominate in Mutual Funds?

The nomination process for your mutual fund holdings is convenient and can be done at two stages:

During Account Opening:

• Most mutual fund application forms have a dedicated "Nomination" section. Simply fill in the details of your chosen nominee, including their name, address, and relationship to you.

After Account Opening:

You can update or register a nomination anytime after opening your account. Here's how:

• Nomination Form: Obtain a physical nomination form from your Asset Management Company (AMC) or investment advisor.

• Online Nomination (if available): Some AMCs allow online nomination through their investor portals. Check with your AMC for this option.

• Complete the Form:  Fill in the nominee's details and your signature.

• Joint Holdings:  For joint holdings, all joint holders must sign the nomination form, regardless of the account operation mode ("anyone or survivor" or "jointly").

• Submission:  Submit the completed form to the designated investor service center of your AMC or its registrar.

Changing Your Nomination:

There's flexibility! You can change your nominee as often as needed throughout your life. Simply submit a revised nomination form with the updated details.

Multiple Nominees:

You can nominate up to three beneficiaries, specifying the percentage share each will receive in the units (whole numbers only, no decimals). If no percentages are mentioned, the units will be divided equally amongst the nominees.

Standard Nomination Form:

A standard mutual fund nomination form is available for download. However, it's always advisable to check with your specific AMC for any variations in their process.

How to Nominate to Your Demat Account?

The good news is that nomination for your Demat account automatically applies to your mutual fund holdings held electronically in Demat form. This means you don't need a separate nomination for your mutual funds if they're already Demat.

Here's a breakdown of how it works:

• Nomination at Demat Account Opening: When you open your Demat account, you provide nominee details for all your holdings, including mutual funds.

• Updating Demat Nomination:  Similar to mutual funds, you can update your Demat account nomination anytime by following the depository's rules and procedures.

• Joint Demat Holdings:  If your Demat account is held jointly, the nomination applies only upon the death of all joint holders. In case of a single joint holder's demise, the holdings transfer to the surviving holder(s).

By ensuring your Demat account nomination is up-to-date, you simplify the inheritance process for your mutual fund holdings held electronically.

Common Misconceptions About Nomination

While nomination is a straightforward process, there are some common misconceptions to clear up:

Myth: Nominee Equals Owner.

Reality:  Your nominee is not the legal owner of your mutual fund holdings. They act as a designated beneficiary, facilitating the smooth transfer of these investments to your legal heirs. The nominee simply receives the units on your behalf and may then be responsible for distributing them according to your wishes, if you have a will specifying such distribution.

Myth: Will vs. Nomination Are the Same.

Reality:  A will and a nomination serve distinct purposes. Your will is a comprehensive legal document outlining the distribution of your entire estate, including property, bank accounts, and other assets. A mutual fund nomination, on the other hand, specifically focuses on your mutual fund holdings. It ensures a swift and hassle-free transfer of these investments to your chosen beneficiary.  However, if your will contradicts your nomination details, the will generally takes precedence.

Myth: Automatic Nomination for Joint Holders.

Reality:  Being a joint holder in a mutual fund account doesn't automatically make you the nominee for the other holder's share. Nomination is a separate process, and It's crucial to discuss and decide on the nomination strategy with all joint holders to avoid confusion in the future.

Conclusion

Mutual fund nomination is a simple yet crucial step to safeguard your investments and ensure your financial legacy is passed on smoothly. By nominating a trusted beneficiary, you can provide financial security for your loved ones during a challenging time.

Remember to review your nomination periodically, especially if there are changes in your family circumstances. Taking this proactive step ensures your investments continue to fulfill their intended purpose – supporting your family's financial well-being, even in your absence.

Considering your personal circumstances and financial goals is essential when making investment decisions, including nomination strategies. Consulting with a financial counselor can provide valuable guidance and ensure your financial plan aligns with your overall objectives.