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Eligibility & KYC Requirements for MF Investment

Introduction

Mutual funds are open to almost everyone, but since they involve money laundering risks, regulatory compliance is strict. Before buying the first unit, every investor must be KYC Compliant. This chapter outlines who is eligible to invest and the procedural requirements.

1. Who can Invest? (Eligibility)

The following entities are eligible to invest in mutual funds in India:

  1. Resident Individuals: Indian citizens.
  2. NRIs (Non-Resident Indians): Can invest on repatriation or non-repatriation basis (except citizens of USA/Canada in some fund houses due to FATCA rules).
  3. Minors: Through a natural guardian (Parents) or legal guardian.
  4. HUFs (Hindu Undivided Families): Making investments in the name of Karta.
  5. Corporates / Companies: Investing surplus treasury cash.
  6. Trusts / Societies: Registered trusts.

Who CANNOT Invest?

  • Any individual who is banned by SEBI.
  • Foreign citizens (unless they are PIO/OCI holders).

2. KYC (Know Your Customer) Norms

KYC is a one-time exercise mandatory for all investors in the securities market (Stocks & Mutual Funds). It is a centralized process registered with KRA (KYC Registration Agencies like CAMS, Karvy, NDML).

Documents Required:

  1. Identity Proof: PAN Card (Mandatory).
  2. Address Proof: Aadhaar, Passport, Driving License, Voter ID.
  3. Photograph: Passport size photo.
  4. Signature: To match with bank records.

Electronic KYC (e-KYC):

  • Paperless process using Aadhaar OTP.
  • Limit: Previously limited to ₹50,000 per year per fund house, but now fully digital Video-KYC enables unlimited investment.

3. Special Case: Investing for Minors

  • Name: Investment is made in the name of the Minor (Child).
  • Guardian: Parents operate the account.
  • No Joint Holder: Minor accounts cannot have joint holders.
  • Change of Status: When the minor turns 18, the account is "frozen." The child must undergo fresh KYC as an adult to operate the account further.

4. FATCA (Foreign Account Tax Compliance Act)

Since 2015, all investors must declare their Tax Residency Status.

  • If you pay tax only in India -> Simple declaration.
  • If you pay tax in USA/Other countries -> Detailed declaration required to prevent tax evasion.

Exam Notes: Writing the Answer

Question: "What are the KYC requirements for investing in mutual funds? Who is eligible to invest?" (10 Marks)

Model Answer:

Eligibility: The broad categories of eligible investors include Resident Individuals, NRIs (subject to FATCA), Minors (via Guardian), HUFs, and Corporates.

KYC Norms: KYC (Know Your Customer) is a mandatory one-time verification process mandated by SEBI to prevent money laundering (PMLA Act).

Process:

  1. Submission: Investor submits PAN, Address Proof (Aadhaar), and Photo to a KRA (KYC Registration Agency).
  2. Verification: In-Person Verification (IPV) is done physically or via Video Call.
  3. Centralization: Once KYC is done for one mutual fund, it is valid for all mutual funds and stock broking accounts in India.

Requirement: Without KYC compliance, no investment (Lumpsum or SIP) is accepted.

Summary

  • KYC: Key mandatory step. One time process.
  • PAN: The universal ID for all financial transactions.
  • Minors: Can invest, but account freezes at 18 until re-KYC.
  • NRIs: Allowed, but with extra compliance (FATCA).

Quiz Time! 🎯

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