Mutual Fund Ownership Documents

In terms of practice that has evolved in the mutual funds industry, mutual funds have stopped issuing certificates to investors, in their open-ended schemes. Investors instead get an account statement, which shows their holdings and the price at which they were bought. Mutual fund holdings of an investor are identified by the account number. Investors can, if they wish, consolidate their holdings in a mutual fund across various schemes and receive a consolidated account statement. The account statement is computer generated and has no signature. It is also not an instrument that can be traded or transferred. It is a very safe way of holding mutual fund units. The account statement shows the holding details, the number of units outstanding and the value of the holdings. All transactions relating to purchase of units, redemption of units, dividends, re-investment etc., are shown in the account statement. The investors’ holdings in a mutual fund scheme on a particular date are also called as outstanding holding. This means on that date, the investor is due to receive value for the given number of units against his name. Along with the account statement, mutual funds also provide transaction slips, which enable investors to buy more units, or sell whole or part of their holdings. An investor can however demand to receive a certificate by writing to the registrar. In a close-ended fund investors usually receive certificates as proof of purchase. These certificates are negotiable instruments, and can be transferred from one person to another. When an investor buys units in the market, the seller will pass on the certificate to the buyer, by signing on the reverse. The buyer then has to lodge the certificate with the registrar and the transfer agent, who will register the buyer and his holdings in the mutual fund’s books. Certificates usually have an account number, a distinctive number and the certificate numbers for the unit actually held. The details of holding are printed on the certificate. Certificates can be issued in market lots of 50 units each, or as a consolidated Jumbo Certificate.

The application form, signed by the holders, is equivalent to acceptance of the offer of the mutual fund, and is the legal document of the transaction. The mutual funds has to provide all relevant information, state all rights and obligations in the offer document which is legal document of offer. The mutual fund is expected to specify the terms, and the investor is expected to read, understand and sign the application forms, in acceptance of the offer. A mutual fund may be able to absolve itself of the legal responsibilities, by disclosing its position in the offer document. An investor cannot claim ignorance of such a provision, after having signed the application forms. The application form binds the investor as having read and understood the terms and conditions of the offer and the formal willingness to abide by such terms and conditions. The disclosure norms for the offer document ensures that all relevant information required for an informed decision by an investor are provided in the offer document and that such information is correct, authentic and verified.

The frequency of the account statement is stated in the offer document. In most cases, investors receive an annual statement if there are no transactions in a year. For every transaction during the year, namely, sale or purchase of units, re- investment of dividends, etc., and the updated account statement is sent to the investor. In modern times mutual funds have provided investors the facility of phone service and internet service. Investors can check the balances in their accounts and effect transactions through the phone and the internet.

It is possible for multiple owners to hold units jointly in mutual funds. Every holding in a mutual fund can have up to 3 joint holders. The first holder is entitled to receive all the information and notifications, as also the dividend payments and the redemption process. Investors can specify the nature of joint ownership which can be on “joint basis” or on “either or survivor basis”. If ownership is on joint basis redemption requisition has to be signed by all holders. In the case of “either or survivor” basis, it is sufficient if one of the holders signs the redemption request. The redemption proceeds however, are payable only to the first holder, in both cases.

The application form contains certain information about the investor. The information includes name, address, telephone and other contact details, occupation, age and the name of the guardian in the case of minor. They seek information to ascertain the tax status of the investor, namely residential status, whether individual, Hindu Undivided Family etc., in order to know the obligations of mutual fund with regard to tax deduction at source. Some mutual funds seek more information about the investor to profile their clients. Mutual funds require investors to provide bank details in the application form. This is to enable electronic transfer of dividend and repurchase proceeds without risk of loss from theft of cheques.

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