Whenever you write a cheque for mutual funds there are certain things that you take care of. Read this space to know what are those precautions and the new changes announced recently.
By CAMS Viveka
Information about precautions to be taken while writing out cheques when investing in Mutual Funds and recent rules changes are presented here.
Validity of cheques is three months
In line with an RBI notification, the validity of all cheques, drafts, pay orders, banker’s cheques is three months from the date of instrument with effect from 1st April, 2012. Investors in Mutual Funds must ensure that all dividend or redemption payments received through cheques are presented to their banks within three months of the date on the instrument for successful clearance.
The Reserve Bank of India (RBI) has advised all banks to issue only CTS-2010 (cheque truncation system-2010) standard cheques. This is to standardize and enhance security features in cheques. CTS-2010 is a benchmark for standardization of cheques issued by banks across the country. This standardization will help clear cheques electronically. A CTS-2010 cheque will not have to go through the process of physical clearance. When a customer deposits a CTS-2010-complied cheque, the bank will send the image of the cheque to the drawee bank, whose cheque has been issued. Clearance is done based on the image. This move will help banks save on transaction cost and time in clearing cheques.
Older, non-CTS cheques will not be in use from 1st April 2013 and investors should make any investment in Mutual Funds using the new cheques.
Corrections on cheques not permitted:
Any kind of changes or corrections on cheques is not permitted without a counter signature. If there is any change in the payee’s name, amount in figures or amount in words, investors will have to write a fresh cheque.
Filling cheques for mutual fund investments
When applying for Mutual Fund Units, care should be taken while filling out the cheque. The cheque amount in words and figures should tally and match with the amount in the application form. Of course, the cheque should be dated correctly and signed and the investment amount should be at least for the minimum amount mentioned in the scheme documents.
Writing a cheque incorrectly or omitting to sign could mean the cheque getting dishonoured; this would mean non-allotment of units and losing the NAV of the day. The Fund and scheme name should be correctly mentioned on the cheque. Care should also be taken to ensure scheme option mentioned in the cheques and application form are the same.
As per AMFI guidelines, mutual fund investments made through third party cheques will not be processed. A cheque issued by and signed by any other person other than the First holder of the investment is a third party cheque. When a payment is made from a bank account that is not held by the beneficiary investor, that is, the First Holder or the Sole Holder, it is referred to as a “Third Party Payment”.
If the cheque is issued from a joint account, the first named applicant/investor must be one of the joint holders of the bank account from which the instrument is issued.
There are exceptions to this rule as mentioned below:
Parents: Payment may be made by Parents/Grand-Parents/related persons on behalf of a minor for a value not exceeding Rs.50,000/- (each regular purchase or per SIP installment)
Employers: Payment may be made by Employers on behalf of employees under Systematic Investment Plans through payroll deductions.
Custodians: Payments made by Custodians on behalf of FIIs or clients.
Such applications should be accompanied by the third party declaration form mentioning the relationship with the First Holder. The form is available at Mutual Fund websites
Payments made by pre-funded instruments like a Pay Order, Banker’s cheque will be accepted if the instrument is accompanied with a certificate from the issuing banker stating the Account Holder’s name and the Account Number which has been debited for issue of the instrument. The Account Holder’s name mentioned in the Certificate should be that of the First Holder. Alternately, investors may submit a copy of the bank statement evidencing the debit for the issuance of the instrument or a copy of the acknowledgement from the bank wherein the instructions to debit the bank account are available. These should contain the bank account details and the name of the investor. The account number mentioned in these supporting documents should be the same as one of the registered bank accounts in the folio or mentioned in the application form.
Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. The views expressed herein are general practices in the Mutual Fund industry and may vary on a case to case basis.