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July 1: New rules to invest in mutual funds, teething troubles initially, but a safer future

All those SIPs will stop where your broker used to transfer funds from your broking account balance to the mutual fund house. You have to sign up for fresh NACH mandates.

June 30, 2022 / 08:13 AM IST

From July 1, mutual fund investments cannot be initiated from a pool account. The money has to go from the investor’s bank account to the bank account of the mutual fund house, as mandated by regulator Securities and Exchange Board of India (SEBI). All transaction platforms backed by stock exchanges will implement this, which may see some teething troubles for investors as well as other stakeholders.

All non-exchange transaction platforms including MF Utility have already implemented it since June 1, of course with some glitches. But the situation is improving gradually and may become error-free as all stakeholders catch up with the new operations rigmarole.

What went wrong earlier?

Mutual fund investors and distributors have been vocal about issues such as delayed confirmations about allotment of units, inability to pay using cheque, RTGS and NEFT, and failed SIP transactions, among others.

As the money moves from investor to the fund house, the transaction platforms have to rely on the payment processing entity for the details such as actual credit of money in a mutual fund’s bank account and the source of funds. Investors are allotted units only when the fund house receives the money. Also, the source of the money so received needs to be verified as being from the investor’s bank account, as mutual fund houses do not accept third-party payments. Put simply, third-party payments are those which do not originate from the bank account of the investor. These issues have led to delayed confirmation of allotment of units. However, MF Utilities—an industry-promoted, widely used platform for transacting units—has clarified that the Registrars and transfer agents systems are ramped up and the situation has improved. It added that there is no delay in allotment of units where rules are complied with. Channel checks with distributors indicate that the delay in confirmation of transactions of up to six days earlier this month has come down to a day or two.

Ganesh Ram, managing director and CEO, MF Utilities, said, “We have represented SEBI for allowing investors to allow non-stock exchange platforms to enable cheque mode payments for investments in mutual funds. We intend to restart offering NEFT and RTGS facilities for payments on or before July 15.”

All these three modes of payments were stopped by MF Utility since April 1. NEFT and RTGS transfer of funds from the investor’s bank account to that of the mutual fund house is being worked out.

Some investors have been complaining about SIP failures. “Some banks from where the SIPs are getting debited could not submit the details of the investors as the old SIP registrations did not have that requirement. And in some cases there is a mismatch between the name mentioned in the folio and the name mentioned in the bank account,” said a senior operations official with a leading fund house, who asked not to be named citing a ban on speaking with the media. As the payment processors could not ascertain the source, the transactions were getting declined. If you too are facing some such issue, then you have to re-register the SIP and in some cases may have to set the name mismatches right.

Investors’ details—the mobile number and email—are also crucial inputs and they have to be correct at the fund folio level. This is essential because the regulator has mandated double factor authentication (2FA) using a one-time password (OTP), which is sent to the email and mobile phone number of investor. Most new investors have been compliant as these are essential inputs for transactions online, say distributors. 2FA has already kicked in for non-exchange platforms from June 1 and it is a mandatory requirement for switch, redemption, systematic transfer plans and systematic withdrawal plans. You have to check if your contact details are sourced right in your statements. MF Utility has provided for an online facility to confirm the contact details, including the email and mobile number of the investor.

Sanjay Shah, founder and managing director, Prudent Corporate Advisory Services, said, “Most of our clients have their contact details in place. Wherever we have seen the details missing or not up to date, we have already approached the clients for updating the records. The entire operational upgrade is in the interest of the investor as it puts them in charge of their investments with less risk in the system.”

Since this becomes a crucial input to transact, it is time to check your mutual fund statement carefully for your details. You can approach the offices of the fund house or the RTA for updating the same. You can also transact offline by signing the right redemption format and submitting to the offices of mutual funds and RTA.

What is going to change on the exchange platform?

All the above issues may also be faced by investors transacting on exchange platforms going forward. The broker-distributors are well aware of it and they have sounded out their clients.

“We have already improved our back-end systems and updated our database. But data issues at various stakeholders levels—be it at mutual fund folio, bank account, distributor—may persist and there may be initial trouble for some clients,” said a senior official with a leading online brokerage on the condition of anonymity.

All those SIPs will stop where your broker used to transfer funds from your broking account balance to the mutual fund house. You have to sign up for fresh National Automated Clearing House (NACH) mandates in favour of the clearing corporation, which can be done online. Ensure that the right bank accounts are linked with your mutual fund folios as the sale proceeds now will be hitting your bank accounts, and won’t get credited to your broking account. 2FA is a must for all transactions involving sale of units.

“Given the month-long experience with non-exchange transaction platforms upgradation for the new regulatory regime and corrective steps taken so far, the stock exchange platforms may not face as many issues,” said the mutual fund official quoted above.

A point to note is in this entire exercise SEBI has not prescribed freezing investors’ folios. But the recent circular making nominations or opting out of nominations mandatory has such a provision for non-compliant folios. Shah advised, “Check your nomination status and update wherever required to avoid last minute rush.”

Investing in mutual funds is becoming safer as risk goes down. However, it also expects investors to play their role in the process.

Nikhil Walavalkar
first published: Jun 30, 2022 08:13 am