NISM Series II B Short Notes – Part 5: Investors in Mutual Funds, KYC & PAN, NRI Investments, Banking Operations
This is Part 5 of our 6-part NISM Series II B short notes series. In this post, we cover two major chapters from the NISM Registrars to an Issue & Share Transfer Agent (Mutual Funds) exam — Chapter 11 on Investors in Mutual Funds (including KYC, PAN, NRI, HUF, FATCA, QFI, institutional investors) and Chapter 12 on Banking Operations in Mutual Funds (bank accounts, payment instruments, ECS, RTGS, NACH, ASBA, NPCI). These are important chapters for scoring well in the NISM Series II B exam.
Quick Answer: What is KYC in mutual funds? KYC (Know Your Customer) is a mandatory compliance process for mutual fund investors that requires proof of identity and proof of address. SEBI has mandated a uniform KYC procedure across mutual funds, brokers, depository participants, portfolio managers, and venture capital funds. Once KYC is completed with a KRA (KYC Registration Agency), it is valid across all SEBI-registered intermediaries.
Chapter 11 – Investors in Mutual Funds Categories of Investors
Mutual fund investors are broadly classified into two categories:
- Individual Investors
- Institutional Investors
Individual Investors – Classification
| Investor Type | Description |
|---|---|
| Resident Individual | An Indian citizen who has stayed in India for at least 182 days in a financial year. Investors above 18 years of age. Unless specifically mentioned as non-resident, all individual investors are assumed to be residents. |
| Minor | An investor who is under 18 years of age on the date of investment. Must provide date of birth. Financial transactions are conducted through their guardian. |
| NRI (Non-Resident Indian) | An Indian citizen residing outside India. Can also be a Person of Indian Origin (PIO). |
| HUF (Hindu Undivided Family) | A uniquely Indian structure where a family's pooled money is managed by a designated family member called the "Karta." Transactions are done by the Karta in his name. |
Investor Information Required When Investing
Individual investors must provide the following information when investing in mutual funds:
- Name — Identifies the beneficial owner of the investment (the folio holder).
- Signature — The investor's identity in fund records. Must be on all valid transactions.
- Joint Holders — An application can have up to three joint holders. They may operate the account jointly or on either or survivor basis.
- Address for Correspondence — Physical address required (post box numbers not accepted). For NRI investors, overseas address is mandatory. The first holder's address is the address for correspondence.
PAN and KYC – Key NISM Exam Topic PAN (Permanent Account Number)
- PAN is an identification number issued by Income Tax authorities.
- It is the single identification number for all financial market transactions in India.
- All mutual fund investors must provide a copy of their PAN card regardless of the amount invested.
- For first-time investors, PAN copy is verified against the original.
- Exception to PAN: Annual investments below Rs. 50,000 made by individuals, NRIs, and sole-proprietary firms are exempt from the PAN requirement.
KYC (Know Your Customer)
- KYC requires proof of identity and proof of residence for all financial relationships.
- SEBI has mandated a uniform KYC procedure for mutual funds, brokers, depository participants, portfolio managers, and venture capital funds.
- KYC once completed is valid across all mutual funds and all SEBI-registered intermediaries.
- KYC-related activities are managed by KYC Registration Agencies (KRA).
- SEBI has mandated In-Person Verification (IPV) of the client by the intermediary doing the KYC.
eKYC
eKYC is a paperless, Aadhaar-based KYC process for starting mutual fund investments. SEBI permits Aadhaar-based eKYC for mutual fund investments. CAMS and KFin Technologies (formerly Karvy) facilitate eKYC for mutual fund investors.
Know Your Distributor (KYD)
Introduced by SEBI and AMFI, the KYD process streamlines mutual fund distribution by requiring biometric identification of all distributors. This ensures that one person cannot hold multiple ARN (AMFI Registration Number) codes, improving accuracy of distributor information.
Minors as Mutual Fund Investors
- Minor = investor below 18 years on the date of investment.
- Date of birth must be provided compulsorily.
- Minors cannot enter into contracts on their own behalf or issue cheques to third parties.
- All financial transactions of a minor are conducted through their guardian.
- Minor becoming Major: When the minor turns 18, they must first obtain a new PAN card, complete KYC with a KRA, and update their bank details. The AMC is informed only after these steps are completed.
NRI Investors and Power of Attorney (PoA) NRI Investments in Mutual Funds
- No specific RBI permission is required for NRIs to invest in Indian mutual funds.
- NRI investors must use payment instruments that clearly identify the source of funds.
| Account Type | Full Form | Currency | Repatriation |
|---|---|---|---|
| NRE Account | Non-Resident External Account | Foreign Currency | Fully repatriable |
| NRO Account | Non-Resident Ordinary Account | Indian Rupees | Repatriable up to USD 1 million per financial year |
Power of Attorney (PoA)
A Power of Attorney (PoA) is a legal document with two parties:
- Grantor — The primary investor who gives authority
- Attorney — The person authorized to act on behalf of the grantor
Key facts:
- PoA holders can exercise all rights of an investor as defined in the PoA document.
- The grantor's signature is recorded in the folio for verification.
- The grantor can continue to operate the account independently even after giving a PoA.
- Mutual fund investors can also nominate a person to receive investment proceeds in the event of their death.
Qualified Foreign Investors (QFI)
QFIs are foreign individuals or entities allowed to invest in Indian mutual funds after completing KYC. They can invest in:
- Equity schemes of mutual funds
- Debt funds investing in infrastructure
- Units of listed debt fund schemes
QFIs can invest through:
- Direct Route — Units held in demat form with a SEBI-registered Depository Participant (DP)
- Indirect Route — Unit Confirmation Receipts (UCR) issued to QFIs; units held by a custodian in India
Restrictions on QFIs:
- Can only purchase and redeem units
- Systematic investments, withdrawals, transfers, and switches are not permitted
- Units are non-transferable, non-tradable, cannot be pledged, and must be free of encumbrances
Institutional Investors in Mutual Funds
| Investor Type | Description |
|---|---|
| Private & Public Companies | Set up under the Indian Companies Act with MoA and AoA. Governed by Board of Directors. |
| Partnership Firms | Formed by individuals under a partnership deed. |
| Association of Persons (AoP) | Associations set up for specific activities as per their charter. |
| Societies & Trusts | Pool individual contributions and manage them for social/religious/educational purposes. |
| Banks & FIs | Set up under Banking Regulation Act or by specific legislation. |
| FIIs (Foreign Institutional Investors) | Foreign institutions permitted to invest in Indian securities after SEBI registration. |
| OCBs (Overseas Corporate Bodies) | Entities founded by NRIs or with majority NRI stakes. Currently prohibited from investing in Indian mutual funds. |
FATCA Compliance
The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law requiring US persons (including those living outside the US) to file annual reports on their non-US financial accounts to the Financial Crimes Enforcement Network (FinCEN).
Impact on Indian mutual fund investors:
- All non-US financial institutions (FFIs) must search their records for US person indicators and report relevant information to the US Department of the Treasury.
- Since India is a signatory to relevant international protocols, all mutual fund investments in India (both individual and non-individual) must be FATCA compliant.
- Investors must provide a self-certification declaring their tax residency status — particularly whether they have US tax residency.
Chapter 12 – Banking Operations in Mutual Funds Types of Bank Accounts Maintained by a Mutual Fund
| Account Type | Purpose |
|---|---|
| Collection Account | Receives investment money from investors. |
| Investment Account | Maintained by the custodian bank to settle securities transactions. |
| Redemption Account | Specifically funded to pay out redemption proceeds to investors. |
| Expense Account | Used to meet regular fund running expenses. |
Mutual funds do not keep idle funds in bank accounts. Banks help mutual funds manage cash efficiently through a Cash Management Service (CMS).
Functions of Collecting Bankers
- Collect payment instruments through the clearing process to realize investor funds.
- Provide reverse feeds showing cleared or bounced status of instruments.
- NFO collecting bankers accept NFO applications and provide a "Collections Confirmation Certificate" after the NFO. Bank collection figures are reconciled with R&T agent records before allotting units.
Payment Instruments in Mutual Funds
Payment instruments are used to transfer funds from the investor's bank account to the mutual fund's collection account. Types include:
- Transfer Cheque — Drawn on the same bank branch
- Local Cheque — Drawn on a local bank
- Outstation Cheque — Drawn on a bank in a different city
- Third-Party Cheque — Drawn by someone other than the investor (generally restricted in mutual fund purchases)
Electronic Payment Instruments
Electronic payment instruments allow the investor to complete the fund transfer without the mutual fund initiating the clearing process. The investor transfers funds and provides proof to the mutual fund.
| Instrument | Full Form | Key Feature |
|---|---|---|
| EFT | Electronic Fund Transfer | Transfers funds at fixed times: 12 noon, 2 PM, and 4 PM. Used by large institutional investors. |
| RTGS | Real Time Gross Settlement | Instant electronic fund transfer between banks. Funds credited immediately. |
| ECS | Electronic Clearing System | Batch processing — funds moved from/to multiple accounts simultaneously on given dates. Retail investors use ECS for SIP payments. |
| ASBA | Application Supported by Blocked Amount | Used for NFO subscriptions. Investor blocks funds in bank account; account is debited only on unit allotment. SEBI-specified banks provide this facility. |
NPCI and NACH
NPCI (National Payments Corporation of India) is the umbrella organization for all retail payment systems in India, set up with RBI and IBA guidance. Its objectives include:
- Consolidating and integrating multiple payment systems into a uniform national platform
- Facilitating affordable payment mechanisms for financial inclusion
NACH (National Automated Clearing House) is a centralised clearing system launched by NPCI to replace and consolidate existing ECS systems across India. Benefits of NACH:
- Standardization and digitization of payment mandates
- Simplified operations
- Reduced operational costs
- Faster activation and processing
Quick Revision – Key Points for NISM II B Exam Part 5
- PAN exemption: Annual investment <Rs. 50,000 for individuals, NRIs, sole-proprietary firms
- KYC validity: Valid across all mutual funds and all SEBI-registered intermediaries once completed
- KRA: KYC Registration Agency — handles KYC activities
- IPV: In-Person Verification — mandated by SEBI during KYC
- KYD: Know Your Distributor — biometric identification of MF distributors
- HUF Karta: Designated member managing the Hindu Undivided Family's investments
- Joint holders: Maximum 3 in a single application
- NRE account: Foreign currency; fully repatriable
- NRO account: Indian rupees; repatriation limited to USD 1 million/year
- OCBs: Currently prohibited from investing in Indian mutual funds
- QFI restrictions: Can only buy/sell; no SIP, SWP, transfer, or switch allowed
- FATCA: Self-certification required from all investors (individuals and non-individuals)
- ASBA: Funds blocked (not debited) until unit allotment in NFO
- NACH: Centralised system replacing ECS; launched by NPCI
- EFT timings: 12 noon, 2 PM, 4 PM
- RTGS: Instant fund transfer; real time
Continue Your NISM Series II B Preparation
- Part 4 – Tax Aspects of Mutual Funds & Operational Concepts
- Part 6 – Financial Transactions, Non-Financial Transactions & Investor Complaints
- NISM Series II B Free Mock Test
- How to Become a Mutual Fund Distributor
- NISM Mutual Fund Exam Guide
This is Part 5 of 6 of our NISM Series II B Short Notes. For comprehensive question banks, mock tests, and study resources to help you pass the NISM II B exam, visit PassNISM.in.