Mutual Fund Basics - A Beginner's Guide to Mutual Fund Investing

What is a EUIN?

Pursuant to SEBI circular dated September 13, 2012, Mutual Funds have created a unique identity number of the employee/ relationship manager/ sales person of the distributor interacting with the investor for the sale of mutual fund products, in addition to the AMFI Registration Number (ARN) of the distributor. This Employee Unique Identification Number is referred as "EUIN"


What is the need for creating a EUIN?

EUIN aims to assist in tackling the problem of mis-selling even if the employee/relationship manager/sales person leaves the employment of the distributor or his/her sub broker.


Is quoting of EUIN a mandatory requirement?

Quoting of EUIN is mandatory in case of advisory transactions. If the transaction is an Advisory transaction, the ARN Holder should put his/her EUIN in the column provided in the application form.

But, if the transaction is an Execution Only, EUIN filed in the application form can be kept blank and the ARN Holder should check the Box which has the declaration from the ARN Holder that states “I/We hereby confirm that where the EUIN space has been left blank by me/us, the transaction is an execution-only transaction”.


For Which transactions EUIN shall be applicable?

EUIN is applicable for transactions such as Purchases, Switches, Registrations of SIP / STP / Trigger STP / Dividend Transfer Plan and EUIN is not applicable for transactions such as Installments under SIP/ STP / SWP / STP Triggers, Dividend Reinvestments, Bonus Units, Redemption, SWP Registration, Zero Balance Folio creation and installments under Dividend Transfer Plans.


Whether it is applicable for all the Distributors?

No. Investors are requested to note that EUIN is largely applicable to sales persons of non individual ARN holders only (whether acting in the capacity of the main distributor or sub broker). Individual/Sole Proprietorship ARN holders should intimate AMFI-unit of CAMS in case they employ any Sales Person so that EUIN could be allotted to them. Further, EUIN will not be applicable for overseas distributors who comply with the requirements as per AMFI circular CIR/ ARN-14/12-13 dated July 13, 2012.


Important note for Investors

  • Investors shall ensure that the application form, if routed through a Distributor shall have a valid ARN code, Sub broker ARN code, and EUIN.
  • Investors are further requested to use only those application forms/ transaction forms which have spaces for the Sub broker ARN code and the EUIN.

Important note for Distributors:

  • Distributors are advised to ensure that the sub broker affixes his/her ARN code in the column separately provided in addition to the current practice of affixing the internal code issued by the main ARN holder and the EUIN of the Sales Person (if any) in the EUIN space.

Introduction

Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.


What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.


Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.


What is the history of Mutual Fund in India and role of SEBI in Mutual Fund industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.


In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.


As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.


All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).


How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).


What is Net Asset Value (NAV) of a mutual fund scheme?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.


What are the different types of mutual fund schemes?

Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

What is an open-ended Mutual Fund



An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

What is a close-ended Mutual Fund



A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Categories of Funds

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

1. What is a Growth / Equity Oriented Mutual Fund Scheme



The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

2. Income / Debt Oriented Scheme



The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

3. Balanced Fund



The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

4. Money Market or Liquid Fund



These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

5. Gilt Fund



These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

6. Index Funds



Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.


What are sector/thematic mutual funds?

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.


What are Tax Saving Funds?

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.


What is a Load or no-load Fund?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.


Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.


What is a sale or repurchase/redemption price in Mutual Fund?

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.


What is an assured return scheme in Mutual Fund?

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.


Can a mutual fund change the asset allocation while deploying funds of investors?

Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.


How to invest in a mutual fund scheme?

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.


Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.


How much should one invest in debt or equity oriented schemes?

An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.


How to fill up the application form of a mutual fund scheme?

An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.


What should an investor look into an offer document?

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.


When will the investor get certificate or statement of account after investing in a mutual fund?

Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.


How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.


As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

A mutual fund is required to dispatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.

In case of failures to dispatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).


Can a mutual fund change the nature of the scheme from the one specified in the offer document?

Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.


How will an investor come to know about the changes, if any, which may occur in the mutual fund?

There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.


How to know the performance of a mutual fund scheme?

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com/ and thus the investors can access NAVs of all mutual funds at one place.

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an effect on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.


How to know where the mutual fund scheme has invested money mobilized from the investors?

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.


Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?

Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.


If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.


How to choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.


Are the companies having names like mutual benefit the same as mutual funds schemes?

Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilize funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.


Is the higher net worth of the sponsor a guarantee for better returns?

In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.


Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com . AMFI has also published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.


If mutual fund scheme is wound up, what happens to money invested?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.


How can the mutual fund investors redress their complaints?

Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints to:

Head Office
SEBI Bhavan BKC
Address: Plot No.C4-A, 'G' Block
Bandra-Kurla Complex, Bandra(East),
Mumbai - 400051, Maharashtra
Tel : +91-22-26449000 / 40459000
Fax : +91-22-26449019-22 / 40459019-22
Toll Free Investor Helpline: 1800 22 7575

FREQUENTLY ASKED QUESTIONS ON KYC NORMS FOR THE SECURITIES MARKET.


1) What is KYC?

Know Your Client (KYC) means identifying and verifying the client’s identity and the identity of the beneficial owner through documents submitted for Proof of Identity (PoI) and Proof of Address (PoA) and compliance with rules, regulations,guidelines and circulars issued by the Board or any other authority for Preventionof Money Laundering from time to time.


2) Who is considered a ‘beneficial owner’?

Beneficial owner is the natural person or persons who ultimately own, control or influence a client and / or persons on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.


3) When is KYC done?

KYC is to be carried out at the time of commencement of an account based relationship. Existing clients are required to update their KYC documents from time to time


4) Why is KYC compulsory?

The Prevention of Money Laundering Act, 2002 (PMLA) along with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules) are the principal laws enacted to prevent money laundering activities in India. As per PMLA and Rules framed thereunder, intermediaries in securities market are required to perform Client Due Diligence. KYC records including details submitted for account opening of the client play a crucial role in ensuring Client Due Diligence.


6. Can intermediaries seek additional KYC information?

Yes, client needs to furnish additional KYC Information as required under the law.


7. What is Part I and Part II of the account opening form (AOF)?

Client needs to fill the account opening form at the time of commencement of an account based relationship. Part I of the AOF is the KYC form in which the basic details about the client is captured.


Part II of the form pertains to the additional KYC information as may be sought separately by the financial intermediary such as asset management company, stock broker, depository participant opening the client’s account.


8. Is there a uniform KYC form to be used for account opening?

Yes. KYC templates provided by Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) for individuals and for legal entities are used for capturing the KYC information. The CKYCR templates - Individual and Legal Entity provided by CERSAI is available at https://www.ckycindia.in/ckyc/?r=download.


9. What are the different modes of KYC verification available to clients?

Clients can complete their KYC verification through physical mode / online or app based mode.


10. Is Permanent Account Number (PAN) card considered as an identity proof for the purpose of KYC?

No. PAN is not included under the list of officially valid document for the purpose of identity under the rule 2(d) of the PML rules.


11. Is it mandatory to provide PAN details, if it is not considered as proof of identity?

Yes. PAN is the key identification number and part of KYC requirements for all transactions in the securities market.


12. Is PAN-Aadhaar seeding mandatory for transactions in securities market?

No. The Indian government has made it mandatory for everyone to link their PAN to their Aadhaar, with certain exceptions for NRIs, non-citizens, those over 80, and residents of the states of Assam, Jammu and Kashmir and Meghalaya. Clients in whose case, PAN Aadhaar linkage are not found to be verified, shall be allowed to transact with the existing intermediary subject to valid PAN, however the client’s KYC shall not be allowed portability in securities market.


13. A client has recently completed PAN-Aadhaar seeding. What is the next step?

The client has to inform the respective intermediary about completion of PAN-Aadhaar seeding. The client can also update this information on the KRA portal.


14. What is the difference between masked and unmasked Aadhaar?

The only significant difference between masked Aadhaar and regular Aadhaar is the visibility of the Aadhaar number. Where masked Aadhaar has only the last 4-digits of Aadhaar visible, a regular Aadhaar will display the complete 12-digit Aadhaar number.


15. What is meant by OVD?

Officially valid documents (OVDs) are government issued documents that can be accepted as identity and address proof and defined as per Rule 2 (d) of PML Rules.


16. Which documents are acceptable as Proof of Identity (PoI) and Proof of Address (PoA)?

The following documents are acceptable as PoI and PoA:

  • the passport;
  • the driving licence;
  • proof of possession of Aadhaar number;
  • the Voter's Identity Card issued by Election Commission of India;
  • job card issued by NREGA duly signed by an officer of the State Government;
  • the letter issued by the National Population Register containing details of name address; or
  • any other document as notified by the Central Government in consultation with the Regulator.


17. Which documents are acceptable as deemed OVD for POA?

In case the document furnished by the client does not contain updated address, the following documents (or their equivalent e-documents thereof) are acceptable for the limited purpose of proof of address, provided that the client submits updated officially valid document (or their equivalent e-documents thereof) with current address within a period of three months of submitting the following documents:

  • utility bill which is not more than two months old of any service provider (electricity, telephone, post-paid mobile phone, piped gas, water bill);
  • property or municipal tax receipt;
  • pension or family pension payment orders (PPOs) issued to retired employees by Government Departments or Public Sector Undertakings, if they contain the address;
  • letter of allotment of accommodation from employer issued by state or central government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions and listed companies and leave and license agreements with such employers allotting official accommodation.


18. Is the client required to update KYC records?

Yes. Clients are required to update KYC records as and when there is any change / modification in the KYC information submitted.


19. Is the client required to intimate change in name?

Yes. Client intending to change his / her name is required to submit the modification form along with the self-attested copy of the documentary proof bearing the new name.


20. If correspondence and permanent address are different, documentary proof for which address is to be submitted?

If correspondence and permanent address are different, then proof for both is to be provided. However, if a client has provided Aadhaar / Aadhaar number for identification and wants to provide a current address, which is different from the address indicated in the Aadhaar, the client may give a self-declaration to that effect to the respective intermediary.


21. What is SARAL account?

SARAL is a simplified account opening form wherein the client can submit one documentary proof of address (either residence / correspondence or permanent). It is provided for individual clients participating only in the cash segment without obtaining other facilities such as internet trading, margin trading, derivative trading and use of power of attorney.


22. Is KYC applicable to minor? What are the documents required in cases of minor’s KYC?

Yes. For KYC of minor, photocopy of the School Leaving Certificate/Mark sheet issued by Higher Secondary Board/Passport of Minor/Birth Certificate/PAN/document proving address and KYC documents for guardian are to be provided.


23. Can a minor invest in securities market?

A minor needs a guardian to make investments in securities market. Further, a document proving the relationship between the minor and the guardian is to be provided.


24. Can a third party address be used as correspondence address?

Yes. A client can authorize in writing stating the relation with the third party to capture address of a third party as a correspondence address, provided that all prescribed ‘Know Your Client’ norms are also fulfilled for the third party.


25. Is in-person verification required to be carried out if the intermediary relies on the records of client due diligence (KYC) carried out by a third party?

No. SEBI registered intermediary can rely on the in-person verification carried out by a third party, if it obtains the records or the information of the client due diligence, including in-person verification.


26. What is digital KYC?

Digital KYC means capturing live photo of the client and officially valid document or the proof of possession of Aadhaar, where offline verification cannot be carried out along with the latitude and longitude of the location where such live photo is being taken by an authorised officer of the registered intermediary as per the provisions contained in the Prevention of Money Laundering Act.


27. How does the digitized KYC process work?

In the digital KYC process, the investor’s photograph, acceptance of officially valid document through technologically assisted facilities like DIgilocker, online / offline / biometric Aadhaar, video capturing in live environment, time stamping, geolocation tagging to ensure physical location being in India and liveliness check is carried out. In the online KYC mode, the documents along with the wet / cropped signature are e-signed.


28. What is the online e-Sign Electronic Signature Service and whether it is a legally valid signature?

e-Sign Electronic Signature Service is an innovative initiative by allowing easy, efficient, and secure signing of electronic documents by authenticating signer using Aadhaar e-KYC services. With this service, any Aadhaar holder can digitally sign an electronic document without having to obtain a physical digital signature dongle. The Electronic Signatures facilitated through e-Sign Online Electronic Signature Service is legally valid.


29. In digital process of KYC, do we need to submit mobile number?

Yes. The mobile number should preferably be the one seeded with Aadhaar.


30. In case registered intermediary is availing penny drop facility using API of the bank, is copy of signed cancelled cheque required to be obtained from client?

If registered intermediary is availing penny drop facility using API of the bank, copy of signed cancelled cheque is not required to be obtained. However, in cases where penny drop match fails, or in cases where penny drop doesn’t return joint account holder name, clients can be asked to submit proofs like copy of signed cancelled cheque.


31. If the investor’s bank does not support the penny drop facility, can such details be accepted based on the copy of the signed cancelled cheque?

The registered intermediary should attempt verification of bank account details using penny drop facility in all cases. But, if the investor’s bank does not provide response to the penny drop, the bank details can be accepted based on the copy of the signed cancelled cheque


32. Can a Non Resident Indian / Person of Indian Origin (NRI / PIO) transact in securities market?

Yes, subject to RBI and FEMA guidelines.


33. What are the documents to be provided for NRI / PIO?

For NRI / PIO, copy of passport / Persons of Indian Origin (PIO) Card / Overseas Citizenship of India (OCI) Card and overseas address proof are required.


34. Is it mandatory to link PAN with Aadhaar for NRIs?

As per the Income Tax Department notification, NRIs who do not have Aadhaar number are exempted from linking of PAN-Aadhaar provided they update their residential status as Non-Resident in the Income Tax portal.


35. Is PAN-Aadhaar linking exemption granted automatically to NRIs?

No. NRIs who do not have Aadhaar are exempted from linking of PAN-Aadhaar only on updating their residential status as Non-Resident in the Income Tax portal.


36. Is an NRI permitted to carry out digital KYC?

Yes. The rules for digital KYC for NRI is similar to that of domestic clients.


37. Can SEBI registered intermediary, while entering into account based relationship, rely on the records of client due diligence (KYC) carried out by a third party?

Yes, subject to compliance with provisions of sub-rule 9 (2) of Prevention of Money Laundering (Maintenance of Records) Rules, 2005


38. What is KRA?

KRA (Know Your Client) Registration Agency is a SEBI registered intermediary to maintain KYC records of clients and provides centralization of the KYC records in the securities market. The intermediary performs the initial KYC of the client and uploads the details on the system of the KRA.


39. What is KRA validation?

KRA validation refers to the process of verifying and validating the KYC attributes of KYC records stored in the KRA.


40. What are Validated Records in the risk management framework at KRAs?

In the risk management framework, the KRAs are required to verify KYC attributes like PAN, Name, Address, client’s mobile number and email id of the client’s KYC records uploaded on their system with official databases such as Income Tax Department database on PAN, Aadhaar XML / Digilocker / M-Aadhaar). The records verified with official databases and where PAN-Aadhaar linkage has also been verified are considered as Validated Records.


41. What is portability of KYC records?

The clients whose KYC records are validated by the KRAs need not undergo the KYC process again when the client approaches another intermediary in securities market (portability of KYC records) and the intermediary can fetch the validated records from the KRA.


42. Are new clients allowed to transact in securities market, pending validation of KYC records by KRAs?

Yes. The clients can open an account with intermediaries and transact in securities market as soon as the KYC process is completed. However, clients whose KYC attributes cannot be verified by KRAs will not be allowed to transact further in the securities market until the attributes are verified.


43. How can a client find the status of his KYC and what are its implications?

KRAs facilitate the clients to check their KYC status on the KRA website. The different KYC status and implications thereto are also available on the KRAs website.


44. My KYC status is shown as “validated” with one KRA. However, my KYC is not seen in another KRA? What is the reason and implication, if any?

Each KYC record is unique and tagged with a single PAN. The client whose KYC record is validated by a KRA has portability of KYC record and the client need not undergo the KYC process again when he / she approaches another intermediary in securities market.


45. Can transactions be allowed in securities market in case of existing clients, as on March 31, 2024, where KYC attributes are not verified?

Yes. The existing clients, as on March 31, 2024, in whose respect KYC attributes cannot be verified by the KRAs shall be allowed to exit (sale / redemption, etc.) from existing investment in securities market subject to adequate due diligence by intermediaries. The client’s email shall be considered as an optional attribute.


46. How can a client find out if any intermediary has downloaded / modified his KYC record?

The client gets an intimation from the respective KRA as and when his / her KYC is downloaded / modified by any intermediary.


47. Does a client who has done his KYC with a DP need to do KYC again if he wishes to invest in mutual funds?

The clients whose KYC records are validated by the KRAs need not undergo the KYC process again when the client approaches another intermediary in securities market (portability of KYC records) and the intermediary can fetch the validated records from the KRA.


48. What is the time period to redress investor grievances pertaining to KYC in SCORES?

Within 21 days from the date of receipt of the complaint.


49. What is CKYCR?

Central KYC Records Registry (CKYCR) is an initiative of the Government of India, which act as centralized repository of KYC records of all entities in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector. Once the KYC form is submitted, a unique KYC Identification Number (also known as CKYC Number) is generated and communicated to the client by SMS / Email.


50. Are registered intermediaries required to upload client’s KYC records with the CKYCR?

As required under the PML Rules, registered intermediaries are required to capture the KYC information for sharing with the Central KYC Records Registry in the manner mentioned in the PML Rules and as per the KYC template finalised by CERSAI.


51. WHAT IS CKYC?

CKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. The aim of this initiative is to have a structure in place which allows investors to complete their KYC only once before interacting with various entities across the financial sector. CKYC will be managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR). The objective of CKYCR is to reduce the burden of producing KYC documents and getting those verified every time when the investor deals with a financial entity for the first time. Thus, CKYCR will act as centralized repository of KYC records of investors in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.


52. What is CERSAI?

Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) is a central online security interest registry of India authorized by the Government of India to act as and to perform the functions of the Central KYC Records Registry under the PMLA (Prevention of Money-Laundering) rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in the digital form for a client.


53. What is the difference between KYC, eKYC and CKYC?

KYC – is the known and regular process in the Mutual Fund industry whereby the identity of an investor is verified based on written details submitted by him / her on a form, supplemented by an In Person Verification (IPV) process. Once the verification is done successfully, the relevant investor data is entered into the KRA Registration Agency (KRA) system and subsequently uploaded to their database.

eKYC – is KYC done with the help of a investor’s Aadhaar number. While completing the eKYC, the authentication of the investor’s identity can be done:
(a) Via One Time Password (Limits investments to Rs 50,000 per year per mutual funds and mandates investments via the online electronic mode)
This data is uploaded into the records of the KRA.

CKYC – is an initiative of the Government of India where the aim is to have a structure in place which allows investors to do their KYC only once. CKYC compliance will allow an investor to transact / deal with all entities governed / regulated by Government of India / Regulator (RBI, SEBI, IRDA and PFRDA) without the need to complete multiple KYC formalities which is an inconvenience / hindrance as of now. It will allow for larger market participation by investors, easing their journey on the financial highway. The CKYC processing is handled by CERSAI.


54. Is the information that is currently sought on the current KYC form and the new CKYC form, the same?

No. CKYC requires additional information (for e.g. – investor’s maiden name, mother’s name, FATCA information etc) to be collected and submitted to CERSAI for completion of the CKYC formalities of an investor.


55. What is ‘KYC Identification Number’?

KYC Identification Number (KIN) is a 14 digit number allotted by CERSAI to an investor who has completed his / her CKYC formalities. This number should be mentioned each time the CKYC details are required to be accessed by any intermediary.


56. From when is the CKYC applicable and what procedure do I need to follow?

CKYC compliance is applicable for investments received from February 1, 2017 onwards. You need to note the following:

a) New investors (investors for whom no record exists in any of the KRAs) will have to mandatorily submit the CKYC form along with the investment application. If the investor has filled the KRA application form in lieu of CKYC form, he will have to additionally submit the Supplementary CKYC form along with the KRA application form.

b) Existing investors (investors for whom a record exists in any of the KRAs, regardless of the KYC status) can continue making investments without any additional requirements. In case any modification is required to be done in the KYC status, then only KRA forms are to be used.


57. Is CKYC compliance mandated for all categories of investors?

No. Currently, CKYC is applicable only to Individuals (both Resident Individuals and Non-Resident Individuals (NRIs)).


58. What about PAN? Is it mandatory for completing CKYC?

PAN is not required to be mandatorily mentioned by the applicant on the CKYC application form provided by CERSAI. This form will be used by institutions which do not require PAN to be provided mandatorily for account opening / transaction purposes.
However, from the securities markets perspective, PAN is a mandatory requirement and therefore the said CERSAI form has been modified at our end and investors approaching us for completing CKYC have to mandatorily provide us with their PAN. The KYC type has to be selected as ‘Normal’ on the CKYC application forms and in case any investor does not have a PAN, the KYC type should be selected as ‘PAN Exempt Investors’.


59. What are the documents to be submitted for completion of CKYC formalities?

You need to submit the following documents:
a) Duly filled and signed CKYC application form OR KRA application form + Supplementary CKYC form (optional)
b) One proof of Identity (self-attested copy)
c) One proof of Address (self-attested copy)
d) One photograph


60. Please elaborate on the documents to be submitted as proof for the information provided on the CKYC form.

You need to submit both proofs of identity as well as address.
For identity proof, you may submit any one document - PAN/ passport / voter ID/ driving license / Aadhaar card / NREGA job card / any other document notified by central government

For address proof, you may use the same proofs as submitted as identity proof (except the PAN, since that does not specify the address). If your permanent address is different from the correspondence address, then you need to submit proof for both the addresses.

Copies of all documents that are submitted need to be compulsorily self-attested by the applicant and accompanied by originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorized for attesting the documents. For more details, please refer to the “instructions / guidelines” over-leaf on CKYC / Supplementary CKYC form.


61. Is date of birth mandatory to be provided for CKYC compliance?

Yes, the date of birth is mandatory information required for processing of your CKYC application.


62. How would I know that my CKYC application is successful?

KIN is being allotted by CERSAI to investors whose CKYC application is found to be valid. An SMS / email will be sent by CERSAI to the registered mobile number of the investor as soon as the KIN is generated at their end. Since CERSAI will not be sending any physical intimation, applicants should ideally provide their mobile number and/or email ID in the CKYC application form.


63 I do not have an email ID / mobile number. How will the KIN be informed to me?

Upon generation of a KIN, CERSAI as a process will communicate the same vide SMS / email provided on the CKYC form. In the absence of both the details, no communication will be sent by CERSAI. Such an investor needs to contact the entity to which the CKYC application form was submitted. You need to provide the details of the supporting documents (for e.g. if PAN copy was submitted as identity proof, then you would need to provide the PAN) that were submitted to the said entity. It is advisable that you provide an email ID / mobile number on the CKYC form so that you do not miss out on any important communication sent by CERSAI


64. If my CKYC application is rejected / fails, will I be informed about the same?

If the CKYC application is not processed / rejected for some reason, no intimation will be sent to the applicant from CERSAI. The entity processing your CKYC application will be aware of such rejections and can approach in case of any queries.


65. Is CERSAI responsible for validation of investor data?

CERSAI will verify the details as against the supporting documents submitted by investor. However, the onus of completing the CKYC of a customer properly and correctly lies with the entity processing the CKYC.


66. How do I check the CKYC status online?

Currently, such an option is not available. If the investor is allotted the KIN, it is confirmation that the investor is CKYC compliant.


67. I have already obtained a KIN. Do I need to submit any more documents for CKYC compliance?

Investors who are already allotted a KIN are considered as CKYC compliant. Such investors do not need to submit any more documents for CKYC compliance. However, please ensure to keep the KIN details readily available as it needs to be mentioned on the application form at the time of investing.


68. Within how many days will I receive the KIN?

The KIN will be allotted by CERSAI within 4 – 5 working days.


69. I have been allotted a folio for the initial purchase submitted to you along with my CKYC form. However, I have not received the KIN yet. Can I submit another purchase till such time?

Yes, we will be able to accept the same provided you have mentioned PAN details on the CKYC form submitted earlier.


For more information, you may contact your distributor, if any, or visit our Investor Service Centers (ISCs).

Click here to access the form for completing your CKYC formalities.


Disclaimer: These FAQs are prepared with a view to guide market participants on KYC norms for the securities market. For full particulars of law governing KYC norms, please refer to the PMLA and Rules framed thereunder and to the Acts / Regulations/ Guidelines / Master Circular / Circulars, etc. appearing in the Legal Framework section of SEBI website at www.sebi.gov.in.