The KYC Mutual Fund mess, and how to come out of it

Existing MF investors do not have to re-do their KYC as long as they continue investing with the fund houses that they have been investing with.

The run-up to March 31, 2024 was fraught with confusion for many mutual fund (MF) investors. The reason – those who did not meet certain conditions were being asked to re-do the KYC (know your customer) for their MF investments or be blocked from all transactions from April 1, 2024.

Following representation from the MF industry, these conditions were eased a bit for existing MF investors.

But this back and forth stirred up confusion and panic among investors. With only one day having passed since the April 1, 2024 deadline, MF industry people say it’s still too soon to gauge how many investors might have been impacted by the blocking of transactions. One may have to wait for another day to know better.

Here’s an FAQ answering questions that MF investors may have at this point in time.

What has changed with respect to KYC for MF investors?

KYC is the process by which entities such as banks, fund houses, stock brokers, etc., verify an investor’s identity before they can begin investing with them.

Initially, all MF investors were asked to re-do their KYC by March 31, if it had originally not been done based on an ‘officially valid document’ (OVD) such as Aadhaar, passport, voter ID card etc. In earlier days, many investors used to submit their utility bills like electricity and telephone bills as address proofs. Now, the new KYC norms have revised the documents that you can submit in support of your KYC. And if someone had done KYC in the past using any of the documents that are now disallowed, then they are supposed to re-do their KYC.

Failure to do so would block them from all transaction from April 1, 2024. This was based on emails sent by the two RTAs (registrar and transfer agents), CAMS and KFin Technologies to mutual fund distributors (MFDs) around the first week of March.

According to one MF industry person as per data shared with SEBI, over 73.5 lakh MF investors or rather unique PANs (PAN serves as the identifier for MF investments) have KYC based on non-OVDs. Read here for more details.

Then, came some relief for existing investors allowing them some leeway.

Now, existing MF investors do not have to re-do their KYC as long as they continue investing with their existing SEBI-registered intermediaries, that is, continue investing with the fund houses that they have been investing with. But there is a twist here.

According to a fund house official, who did not wish to be named, investors will not be allowed to transact with any new fund house unless they re-do their KYC once and for all with Aadhaar, or with any other OVD (other than Aadhaar) every time they invest with a new fund house.

This means, that that Aadhaar-based KYC reigns supreme. If your KYC at the time when you first invested in mutual funds was based on Aadhaar, you don’t need to do a re-KYC today.

That apart, investors also need to validate their mobile number and email ID on one of the KYC registration agency or KRA websites (more on this later).

As regards first-time MF investors, they will henceforth have to do their KYC once if using Aadhaar, or every time they invest with a new fund house, if using one of the other OVDs (other than Aadhaar). Non-OVDs will not be accepted for KYC.

Emails sent by CAMS and KFin Technologies to MFDs mentioned that KYC must be based on any one of the OVDs (including Aadhaar). Then, can’t investors choose any OVD and not just the Aadhaar?

As per the details emerging from the Indian MF industry, “Aadhaar is the supreme document among all officially valid documents,” as one MF industry official said on the condition of anonymity.

While there is a list of OVDs that can be used for KYC, conversations with other industry people too, seem to suggest that it’s best to use your Aadhaar card rather than the other OVDs to ensure your KYC is foolproof for all times to come. Roughly over 18.5 lakh MF investors (unique PANs) have non-Aadhaar based KYC.

What are the different types of KYC statuses that MF investors can have?

Depending on the ID proof used for KYC and whether your email and mobile have been validated by the KRA, an investor could have one of the following KYC statuses –validated, registered, on hold, or rejected.

Validated: Where the investor’s original KYC was based on Aadhaar and both his mobile number and email ID have been validated by the KRA.

What is allowed – Investor can continue with all transactions across all fund houses.

Registered: Where the investor’s KYC was based on an ID proof other than Aadhaar and both his mobile number and email ID have been validated by the KRA.

What is allowed – Investor can continue transacting with existing fund houses that he already has investments with. But, he will not be allowed to transact with any new fund house unless he does a one-time fresh KYC using Aadhaar, or a fresh KYC using any other OVD (other than Aadhaar) with every new fund house he invests with.

On hold: Where the investor’s KYC is based on a non-OVD or his contact details (email and mobile – even any one) are invalid.

What is allowed: Investor will not be allowed to transact even with respect to his existing investments. He will have to do a fresh KYC / update his contact details before he can begin transacting again.

Rejected: Where an investor’s KYC has been put on hold by the KRA, then after 10-15 days, this will be moved to ‘KYC rejected’ status.

What is allowed: Investor will not be allowed any transactions.

Why the need for re-KYC?

Industry people we spoke with say that there has been a rise in fraudulent transactions with people using fake ID proofs for KYC purposes. Sometimes such a KYC done for one industry (say, mutual funds) is being used for another, say for taking loans. There is, therefore, a need to have a reliable KYC that has been validated by the source itself. The Aadhaar is a good example of this.

Thanks to the Aadhaar QR code, a mutual fund house can verify the identity of the cardholder with the UIDAI (Unique Identification Authority of India). This is something not possible with other ID proofs such as the driving license, passport etc.

How to re-do your KYC?

According to the fund house official mentioned earlier (who did not wish to be quoted), if your KYC status is ‘on hold’, then the only way to re-do your KYC is via submitting a physical KYC form either to one of the fund houses or the RTAs.

But in case your KYC status is either ‘registered’ or ‘rejected’, re-KYC can be done online on the website of any one fund house (we are unable to confirm if all fund houses provide this facility). The updated KYC will then reflect in all your MF investments across all fund houses.

What is mobile and email validation?

In cases where the KYC was based on Aadhaar, this validation is likely to have been already done at the back-end by the KRA. In cases where this has not been done, the investor can go to one of the KRA websites, enter his PAN and other details to receive an OTP and complete the process. You can start with CVL KRA which is the KRA for a vast majority of investors or else try, NDML KRA, CAMS KRA  or Karvy KRA.

What if you are still unable to validate your mobile and email on KRA websites?

If your KYC status is ‘on hold’ then you can update your contact details via physical KYC form submission only. If the KYC status is ‘rejected’, this can be done online. (See answer to the earlier question ‘How to re-do your KYC’).

If you are an NRI (non-resident Indian) with a non-Indian number, how do you validate your mobile and email ID?

You will not be able to receive an OTP on your mobile number and so you can’t validate it. As a result, your KYC status will show as ‘registered’ (and not ‘validated’).

That means, you can continue to transact with the existing fund houses that you already have investments with. But, you will not be allowed to transact with any new fund house unless you re-do your KYC once with Aadhaar or with any other OVD (other than Aadhaar) every time you invest with a new fund house.