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HDFC Mutual Fund discontinues cash investments: What you should know

Although most mutual fund investments are made using bank transfers or cheques, there was a small window for cash, which HDFC MF closed on January 30.

January 31, 2023 / 10:56 AM IST
Representative image.

Representative image.

HDFC Mutual Fund said it will stop accepting cash as a means of payment for investment in units of its schemes from January 30. Most fund houses do not accept cash for purchase of mutual fund units. Here’s what you should know.

Why stop cash as a means of payment?

Mutual fund investors can pay for mutual fund units using internet banking and various online transfer modes. Investors can also issue cheques drawn on the bank accounts mapped to their mutual fund folios. They must declare that the payments are made using funds from their bank accounts and not of third-party funds or instruments.

However, the Securities and Exchange Board of India had allowed mutual fund houses to accept cash as a means of payment, subject to a limit of Rs 50,000 per year per investor at the fund house level. Such investors must comply with know-your-client requirements and also need to furnish their bank account details while opening the folio.

Though the cash facility has been around for many years, experts said there are few takers for it.

Why has it not caught on?

Individuals were pushed to digital means of payments first when India announced demonetisation in November 2016. The Covid-19 pandemic further accelerated the process of digital adoption. Many investors including senior citizens took up digital payments, for both daily expenses and high-value investment transactions. That pushed investors away from cash and even cheques are becoming things of the past.

“The infrastructure of a mutual fund branch is not geared for cash transactions. They are not banks and do not have expertise in handling cash,” said a senior operations officer with a fund house who is not allowed to speak to the media.

Earlier, a few fund houses limited cash transactions to a few designated branches. Some asked investors to deposit cash directly in the mutual fund house’s bank account and obtain a stamped deposit slip. The slip would be attached to application forms and processed for purchase of mutual funds units.

“There is a limit of Rs 50,000, which does not give much headroom for cash investments. Since there is a requirement of furnishing details of a bank account at the time of filling up the application form, most investors found it easy to handover a cheque or make a digital payment over running around with cash,” said the chief operations officer of a fund house who is not allowed to speak to the media.

What happens if a fund house stops accepting cash?

When a fund house stops accepting cash, those investing in mutual fund units will have to start issuing cheques or use other digital means to continue their investments. The investments will retain the portfolio numbers as well. There are no restrictions on redemptions.

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Are digital payments better?

“Investors have been proactively embracing digital means of investments as investors find it more convenient than the paper route,” said Anup Bhaiya, founder of Mumbai-based Money Honey Financial Services.

More investors will be going digital and it makes sense for them to use digital means of payments to build large corpus, he said.

Digital payments can also help to save costs and transactions can be automated.

“For investors keen on staggered investments, visiting a mutual fund branch each month will be cumbersome and they would not be able to use automated procedures,” said Parul Maheshwari, a Mumbai-based certified financial planner. “Since the redemption and dividend pay-out is credited to the bank account mapped with the folio at the time of investment, investors are better off investing through banks.”

“In the digital era, for individuals, banking has become convenient and so are investments,” said Abhay Mathure, a mutual fund distributor in Mumbai. “There are no benefits associated with investing in cash. Instead, investors suffer a lot. Better to go digital as soon as possible.”

Systematic investment plans are the favourite means of investing for individuals, especially in equity funds. Staggering investments in equity funds not only makes it less pinching but also helps reduce the risk of timing.

Also Read | Check out Moneycontrol’s curated list of 30 investment-worthy mutual fund schemes

Investing in the digital world without cash helps you do that with ease.

Nikhil Walavalkar
first published: Jan 31, 2023 10:56 am