Can Mutual Funds Be Transferred?

Many individuals desire to donate mutual fund units as a token of affection to their loved ones, or to leave them to their loved ones when they die. The mutual fund transfer technique, however, is not without problems. 

Most people are still unaware of the processes and documentation required for mutual fund transferability. In addition, the unitholder must register the nominee for each folio. 

An individual unitholder or a group of unitholders may designate someone to claim the units in the case of their death. When an investor fills out information for a nominee while opening a bank account or participating in a mutual fund scheme, they may feel uneasy. This is a necessary process for the mutual fund transfer. 

Although everyone realises that death is inescapable and that investors should designate someone to claim their mutual fund units in the case of their death, many investors are unwilling to learn about the nomination procedure. In certain cases, they may not even complete the nomination information, making things challenging for their legal successors. 

According to the Association of Mutual Funds in India, the nomination is a simpler and less expensive method of allowing one’s loved ones to collect the money promptly and easily in one’s mutual fund folio, Demat account, or bank account after one’s death.

Who can claim?

After an investor’s death, the following individuals are able to collect the Mutual Fund investments-

• Joint account holders: The remaining joint holders can claim the funds. This process is usually uncomplicated because the funds are distributed to the surviving.
• Nominees: A nominee is the person specified by the investor to receive the investments after their death. Nominees have a clear, predefined right to claim the investments, simplifying the transfer procedure.
• Legal heirs: In circumstances when no nominee is named, the deceased’s legal heirs may claim the investments. Legal heirs are often identified by a will or in the absence of one, through legal succession regulations. Legal heirs may be required to complete additional documents and legal requirements. 

What happens if the unitholder does not name a nominee?

A real estate investment trust unitholder does not choose a nominee to receive their units upon death. Then there are many options. First, if the unitholder died without a will their units would be distributed to their lawful heirs. This is in accordance with the state’s intestacy rules. 

The trustee must identify and authenticate the heirs before distributing the units. Second, if the unitholder left a will but did not name a beneficiary for the units, they may pass into the residuary estate and be divided with other assets. 

The executor would have to transfer the units to the residuary beneficiaries. Third, the declaration of trust or other REIT papers may include default rules governing what happens to units if an unitholder dies without making a proper beneficiary designation. 

This might include transferring the units back to the REIT itself. In any event, a lack of unambiguous beneficiary designation might complicate the transfer, resulting in delays or conflicts over ownership. Proper estate planning is recommended to minimise uncertainty.

Methods for transferring mutual funds

You might wonder can mutual fund be transferred. There are several ways to transfer mutual fund units-

• Transfer to another individual – Investors can use transfer documentation to give or bequeath mutual fund units to another individual. This is frequently done for estate planning considerations, such as passing units down to heirs. Both the transferor and the beneficiary must submit the appropriate paperwork.
• Transfer on death registration – Parties involved in mutual fund can name a beneficiary who will automatically receive mutual fund units following the original owner’s death. To establish a transfer on death registration, you must submit paperwork.
• Transfer to a trust – Mutual funds can be transferred into a trust by altering the ownership registration. Special restrictions exist for transferring units to revocable living trusts versus irrevocable trusts.
• Transfer between accounts – Investors can move mutual fund units between brokerage accounts or from an individual account to an IRA. Brokerage firms or mutual fund companies manage the paperwork.

Factors to consider for mutual fund transfers

Now you know how to transfer mutual funds from one broker to another. While mutual funds can be transferred using the methods above, there are some important factors to consider-

• Tax implications – Selling or gifting mutual funds may trigger capital gains taxes if the units have appreciated in value. Consult a tax advisor before transferring funds.
• Registration differences – To transfer units, the original and new owners must have the same account registration names.
• Account minimums – The new account must meet the fund’s minimum investment balance requirements to receive the units.
• Processing time – Transfer requests can take 2-4 weeks to process as ownership change paperwork is completed fully. Units are frozen for trading during the transfer process between the parties involved in mutual fund.
• Cost basis – The cost basis and holding period carry over to the new owner, which impacts taxes down the road.
• Beneficiary implications – Transferring units may require updating beneficiary designations on the new account.
• Regulatory review – Larger transfers may trigger a review by fund managers to prevent money laundering activities.

Benefits of transferring mutual funds

Some advantages of transferring mutual funds are-

• Switching to a better-performing scheme: If an investor is dissatisfied with the performance of their existing mutual fund scheme, they can transfer their units to a better-performing one. This might help them increase their investment returns.
• Saving on taxes: Transferring units from debt to equity funds may allow investors to save on taxes. This is because debt funds are taxed based on the investor’s income level, whereas equity funds are taxed at a lesser rate.
• Consolidating investments: If an investor holds units in various mutual fund schemes, they can transfer them to a single plan. This can help individuals streamline their investment portfolio and track their performance more effectively.
• Changing investment goals: If investors’ investing objectives change, they can transfer their units to a scheme more suited to their new aims. This can help them remain on track and meet their financial objectives.

What are the legal documents needed?

When a nominee claims an investment, the fund company requests legal joint application for mutual transfer. 

According to the circular issued by SEBI, a letter from a joint holder or a nominee is required. In addition, the death certificate of the deceased unitholder and the nominee’s Know-Your-Client documentation will be requested. The bank account mandate is also necessary to register the nominee’s bank account rather than the one that already exists or that of the dead unitholder. These papers might include an indemnification bond if the investment exceeds Rs.1 lakh or an affidavit signed by the legal successor. 

Final note

Transferring mutual fund units by gift deed is not possible. Unitholders must complete the nomination procedure appropriately to guarantee that their assets are transferred to their designated nominee or legal heir. SEBI and AMFI’s policies are designed to protect investors’ interests and prevent insider trading or undue transfer of securities, both of which can damage the whole market system. Going against such restrictions may result in harsh investor fines under SEBI and AMFI guidelines.

FAQs