Free-look period in an insurance policy

Free-look gives you a second chance to review your policy and return it if you feel you misunderstood or were missold the plan

A good merchant gives you some time to review your purchases and exchange them if you are dissatisfied. Your bill, other than costs, also mentions the terms and conditions and the time period during which you can bring the goods back for an exchange. A similar practice is prevalent in the insurance industry as well, but here it’s a mandatory condition that insurers have to follow. By law, they are required to give you a window, or what’s also called the free-look period, to review your policy and if you are dissatisfied, return it and get your money back. Free-look is an important feature as it gives you a second chance to review your policy and understand what you have bought and also return it if you feel you misunderstood or were mis-sold the plan. Here is more on free-look period in life and health insurance policies.

In Life Insurance
The process of buying a life insurance policy starts with filling up the proposal form. The form tells the insurer all that it wants to know about you in order to insure you. You would also need to submit additional documents such as proof of income and other know-your-customer (KYC) details. Often, at this stage, you also pay the first-year premium for the policy. After this, depending on factors such as the product you have chosen, your age and the sum assured, the insurer may ask you to undergo medical tests. These tests are paid for by the insurer. Once the insurer agrees to insure you, it will dispatch the policy documents. The free-look period kicks in from the time you receive the policy document. The insurer has to give you a window of 15 days to review the policy documents. If you are not happy, you can return these. The insurer will then ensure that you are within the 15-days window and then subsequently deduct costs for insurance cover for that time, stamp duty charges for issuing a policy bond and costs of medical check-ups, if any, and reimburse the difference.

In Health Insurance
Health insurance policies, too, are required to offer a free-look period of 15 days. Typically, health cover is an annual contract, which you renew every year. Free-look only applies to the first-time purchase and not to renewals. It kicks in from the time you receive policy documents. If you return the policy during this time, the insurer will pay the premium net of costs such as stamp duty and insurance for the days you were covered. Unlike life insurance policies, the insurer bears at least 50% of the cost of medical tests for medical plans that are renewed every year. This cost which will be deducted from the premium as well when it returns the money if you return the policy. Health plans such as indemnity policies, defined benefit policies such as critical illness plans and personal accident policies come with a 15-day window. But there is one exception to the rule. If the policy is issued for a period of less than a year, then the free-look rule is not applicable. Shorter-duration plans are, typically, travel insurance policies given for durations of less than a year.

The period depends on the number of days of travel. But if you have a travel policy that covers you for a year, as is with travel insurance for students, the free-look applies.

PPF: The incomplete solution

The incomplete solution

If it is a safe investment you are looking for, then the 8.1 per cent tax-free interest on the PPF is hard to beat. But it suffers from 3 key disadvantages

Available through the India Post network as well as leading banks, the Public Provident Fund is the preferred retirement vehicle for the non-salaried and the self-employed.

The scheme
Just like the NPS, the PPF also offers a flexible structure where you can make either monthly or lump-sum investment every year. The investments can range anywhere between R500 and R1.5 lakh a year, which is the maximum ceiling on investments. The PPF’s maturity period is 15 years, but this is extendable in blocks of five years as the scheme matures. Early withdrawals from the account are allowed every year from the seventh year onwards. This makes the scheme more liquid than both the EPF and the NPS. The money collected in the PPF is used to fund the borrowing programmes of both the central government and the states. Interest rates on the scheme have been made market-linked from 2012, and are now subject to a formula based on the prevailing G-sec yields.

Returns
The PPF is in the process of making a transition from a ‘fixed-return’ small savings scheme to one whose rates will ‘float’ up and down with market interest rates. The interest that you will earn on your PPF account for each financial period is announced by the central government in advance. This rate applies not only to your contributions for the year but also to all the outstanding balances that you may have parked under the PPF account. In 2015-16, the PPF offered an interest rate of 8.7 per cent to its subscribers. From April 1, 2016, these rates have been slashed to 8.1 per cent.

The incomplete solution

Taxation
The PPF is still in the EEE regime. Your contributions to it are exempt from tax under Section 80C (provided you have room under this section) to the full extent of R1.5 lakh. The interest earned is exempt from tax and so are final withdrawals.

What’s changed
With the government keen that interest rates on small-savings schemes should be ‘market-linked’ and not out of sync with bank deposit rates, it has announced significant changes to the interest calculations in March 2016. The interest rate on the PPF will now be reset every quarter and fixed at a 0.25 per cent spread over benchmark G-sec yields. G-sec yields for this purpose will be the average yields announced by FIMMDA for the preceding three months. While this will ensure that you will get higher rates if interest rates in the economy move up, you should certainly brace for greater volatility in the PPF rates from here on.

Apart from the changes in rate-setting, premature closure of the PPF account has been allowed too (before the maturity of 15 years). Subscribers have been allowed to close the account to meet specified emergencies (such as critical illness or higher education of children) with a 1 per cent penalty on the interest payout. However, such a premature closure is only allowed for investors who have completed five years.

The incomplete solution

Our take
If it is a safe investment you are looking for, then the 8.1 per cent tax-free interest on the PPF is hard to beat, even after the recent pruning. The early closure rule has also made the PPF far more liquid than either the EPF or the NPS. PPF remains a good bet on the taxation front, with the EEE regime intact. Unlike the NPS, your final withdrawals from it are not subject to any conditions such as purchase of annuities.

However, the PPF suffers from three key disadvantages in its current form. One, even if interest rates in the economy were to go up (and that is unlikely over the really long term), its returns are likely to be lower than instruments such as the NPS. The PPF invests in the safest instrument of all – government securities – and the safest instruments are also bound to offer the lowest rates at any given point in time. Therefore, even if you are a risk-averse investor who wants to avoid equities, the corporate bond and G-sec options of the NPS may offer a far better risk-adjusted return than the PPF.

Two, the quarterly ‘floating-rate’ structure brought in now will make it impossible for you to plan towards a specific retirement corpus using the PPF. Despite it being a long-term retirement vehicle, floating rates will not allow you to reap the benefits of buy-and-hold investing.

Three, the annual investment cap of R1.5 lakh on the PPF means that you cannot step up your retirement savings as your income rises. If you depend on the PPF alone, it may leave you with an inadequate corpus at retirement.

Credit: valueresearchonline.com

Say no to endowment policies and ULIPs!

The shroud of simplicityULIPs and endowment plans are very popular in India. Knowingly or unknowingly, most people end up buying these two types of policy. They appear to be simple, transparent and highly beneficial. This article is an earnest attempt by us to dispel the myth (or shall we say hype?) around ULIPs and endowment plans. We will also tell you what are the best alternatives.

What are ULIPs and Endowment plans?
They are both insurance cum investment products. Neither of them is recommended as they offer a sub-optimal combination of insurance and investment.

ULIP is a market-linked insurance scheme where the scheme invests in equity or debt oriented schemes, whereas endowment plans offer a guaranteed benefit called the sum assured.

Why are they so popular?
Three reasons came to our mind and we think you will agree with at least one of the reasons.

  1. A lot of Indians buy insurance in haste and that too for the sole purpose of saving tax and they do so without fully understanding the products.
  2. Often the insurance agent is a neighbour, or a friend or, even worse, a relative. It’s kind of difficult to turn them down. So, we end up buying an endowment or a ULIP without giving it much thought. Also, these policies are pushed hard by agents as they involve attractive commissions.
  3. Many people see insurance as a useless expense and hence they think it’s better to just buy a product that will give some return as well. Just like they fail to see the effect of inflation, they fail to see the sub-optimal returns from these products.

What’s wrong with them?
Neither do they provide adequate insurance, nor a good investment solution. Let’s explore the point by looking at the two purposes separately.

Insurance
Most often, people fail to fathom what kind of insurance coverage they need. For instance, in a family of four where you are the only earning member, a life insurance coverage of Rs 5 lakh (see example below) is simply not enough in the event of your untimely death. The effect is more pronounced if you haven’t left them much inheritance and/or if you had loans running. And, then there’s inflation, which will eat away your wealth. To put things in perspective, if a term plan cover of Rs 50 lakh costs you Rs 7000 per annum, it will cost you Rs 5 lakh per annum in case of a ULIP.

Investment
The biggest factor that goes against them is the exorbitant charges. A significant percentage of the premium you pay, particularly in the initial years, are deducted in the form of various fees and charges, the biggest component being distributor commissions. This reduces the amount of your premium that is actually invested to generate returns. Over a long period, that makes a huge impact on the total wealth you are able to accumulate. Below we have presented one aspect of ULIP, its numerous charges.

ULIP
Age: 35
Annual premium: Rs 50,000
Sum Assured: Rs 5,00,000

The table below enlists a set of charges that are levied by ULIPs. Now, mind you that these charges aren’t exactly hidden. You will find them on your policy papers but probably wouldn’t give it much importance. The actual invested amount is after deducting the following charges which make up almost 7% of the total invested amount.

So, in 10 years you have paid Rs 5 lakh. However, the actual invested amount, after deducting all the aforementioned charges, will be around Rs 4.68 lakh.

So what are the alternatives?
It is always better to keep insurance and investment separate. If you have financial dependents, the first thing that you should do is to buy a term insurance with an adequate cover. Put the rest of the money in one or two good diversified equity funds. But, what if you are risk averse? In that case, we would suggest you to stick to a term plan & good old PPF. It will still give you better returns than an endowment plan.

A number is worth a thousand words
We don’t want you to take our word (or anyone else’s for that matter) for it. So, let’s examine the shortcomings through an illustration.

In the table below, we have taken the 3 possible options – buying a ULIP, buying an endowment plan, and buying a term plan+equity mutual fund. The table illustrates what kind of returns you would get on each in the last 10 years (based on historical data). For the sake of parity and returns, we have considered the best performing products from each category.

Inference
The table above is pretty self-explanatory. Firstly, in the third option, you get an insurance coverage that is ten times more (50 lakhs) than that of a ULIP. Secondly, the return is significantly better in the third option. So, the verdict seems quite clear.

Advice
Insurance is an expense and it should be treated as an expense. Don’t mix insurance with investment. Mixing the two will give you less than moderate returns from both.

What can you do now?

  1. There is something called the free-look period that is valid for 15 days. If you are not satisfied with the insurance you bought, you can return it within 15 days of buying and get a refund. Click here for more details.
  2. If your policy is older than 15 days, we would suggest you to return it, bear the corresponding loss and buy a term plan immediately. Rest of the money, as we said earlier, you should invest in well-diversified equity mutual funds.

How to buy a mutual fund?

How to buy a mutual fund

Here is a long read for the long weekend!

In case you feel lazy to read this you can call me on 9999 321 868. I can help you with your mutual fund investments 🙂

 

What you need to get started with Mutual Fund investing?
To start investing in a fund scheme you need a PAN, bank account and be KYC (know your client) compliant. The bank account should be in the name of the investor with the Magnetic Ink Character Recognition (MICR) and Indian Financial System Code (IFSC) details. These details are mentioned on every cheque leaf and it is common for an agent or distributor to seek a cancelled bank cheque leaf.

How to get your KYC?
The need for KYC is to comply with the market regulator SEBI in accordance with the Prevention of Money laundering Act, 2002 (‘PMLA’), which undergo changes from time to time.

KYC process is investor friendly and is uniform across various SEBI regulated intermediaries in the securities market such as Mutual Funds, Portfolio Managers, Depository Participants, Stock Brokers, Venture Capital Funds, Collective Investment Schemes and others. This way, a single KYC eliminates duplication of the KYC process across these intermediaries and makes investing more investor friendly.

Documents required to be submitted along with KYC application

  • Recent passport size photograph
  • Proof of identity such as a copy of PAN card or UID (Aadhaar) or passport or voter ID or driving licence
  • Proof of address passport or driving license or ration card or registered lease/sale agreement of residence or latest bank A/C statement or passbook or latest telephone bill (only landline) or latest electricity bill or latest gas bill, which are not older than three months.

You will need to submit copies of all these documents by self-attesting them along with originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorised for attesting the documents. In case you are unable to furnish proper documents, it could result in delays in getting a KYC.

Resident Indians can get it attested by: Notary public, Gazetted officer, Manager of a scheduled commercial or co-operative bank or multinational foreign banks. Make sure the name, designation and seal is affixed on the copy.

NRIs can get attestation from: Authorised officials of overseas branches of scheduled commercial banks registered in India, notary public, court magistrate, judge, Indian Embassy in the country where the client resides.

How to check your KYC status?
Existing investors and those who have submitted their applications can check the status on KYC compliance with their PAN number with any of the KYC Registration agency

Mutual fund application form
Each mutual fund scheme has a form that investors need to fill. If you start investing in the systematic investment plan (SIP), you need to fill in two forms: one to open an account with the mutual fund and the other to specify your SIP details such as frequency, monthly instalment amount, and date on which the SIP sum is to be invested.

Investing for Minors
If you wish to invest in the name of a minor, you need to fill in a third-party declaration form.

  • Only parents are allowed to invest on behalf of their children
  • Documents that establish the parent’s relationship with the child should be submitted (Passport, birth certificate or any other ID proof)
  • If the child has no parents in case of an eventuality, then a court-appointed guardian can invest if necessary documentary proof is submitted to establish the relationship between the minor child and the guardian

Growth, Dividend or Dividend Re-investment
When investing in mutual funds, there are three options that are available in which you could invest: growth, dividend and dividend reinvestment. One is normally expected to select one of the three options when filling an investment form, however, in case if you do not fill any of the option, the fund house selects the default option for the scheme as mentioned in its Scheme Information Document (SID), which is most often the growth option. Investors have the flexibility to change the investment option at a later date to suit their convenience.

Growth option: In this option, the scheme does not pay any dividend, but continues to grow. Therefore, nothing is received by you as a unit holder and hence, there is nothing to reinvest in the scheme. Any gains made by selling the fund holdings are invested back into the scheme, which can be seen in the NAV (net asset value) of the scheme, which rises over time. But, the number of units with the investor remains the same.

Dividend payout: In this option, the mutual fund scheme pays you from the profits made by the scheme at regular periods which could be monthly, quarterly, half-yearly or yearly in case of debt funds and at irregular intervals in case of equity funds. A liquid fund also provides for a daily or weekly dividend option. However, you should be aware that dividends are not guaranteed, which means a fund is not bound to pay out a dividend; it may or may not pay a dividend.

Dividend reinvestment: In this option, the dividend is not paid to you, instead it is reinvested in the fund scheme itself by buying more units on your behalf.

Each of the three options has its share of pros and cons, which will vary depending on your needs. As investors, the treatment of gains and taxes are the two essential features that differentiate these options. If evaluating the returns from an investment at a point of time, there is no difference among the three options. The difference emerges in an implicit form with respect to the applicable taxes.

Further, it is important to consider the tax impact when selecting between the growth, dividend payout or dividend reinvestment options as the post-tax returns’ differs between the options. This difference occurs because, the tax treatment is different for long-term and short-term holding period. The tax treatment also differs for equity and debt funds.

Capital Gains from Mutual Funds

Equity and Equity-oriented Hybrid Funds

Short-term holdings (less than one year) Long-term holdings (more than one year)
Taxed as short-term capital gains, currently 15 per cent Not Taxed

All Other Funds

Short-term holdings (less than three years) Long-term holdings (more than three years)
Taxed as per applicable marginal rate of tax 20% with indexation

Dividend Income from funds

Type of investment Dividend tax
Equity and Equity-oriented Hybrid Funds None
All Other Funds 25%*
* for individuals and HUF, plus surcharge as applicable and 3% education cess

Where and how to buy funds?
Like the many mutual fund schemes to choose from, there are several ways in which one can invest in them. One can invest online or offline or in direct as well as regular plans. Like everything else, each option has its limitations and advantages, which vary for each investor.

Direct Plan: Since January 1, 2013, all mutual fund houses have rolled out a new plan under all of their existing fund schemes-the Direct Plan. These plans are targeted at investors who do not make their mutual fund investments through distributors and hence have a lower expense ratio compared to existing fund schemes of the AMC.

This means that you, as an investor, will get an opportunity to earn a slightly higher return from your mutual fund despite it having the same portfolio. The direct plans will not charge distribution expenses or commission, resulting in these plans having lower annual charges and eventually, a different (higher) NAV compared to the regular plans.

Through intermediaries: There is a wide variety of intermediaries available. These include most banks, distribution companies having national or regional presence, some stock brokers (including online brokers) and a large number of individuals and small financial advisory companies. All intermediaries have to be registered with the Association of Mutual Fund in India (AMFI), which also maintains a searchable online directory at www.amfiindia.com. The website also lists intermediaries who have been suspended for malpractice to protect investors from going back to them.

The intermediary, normally brings the required mutual fund application form, helps you fill the forms, submit the forms and other documents to the Mutual Fund office and sometimes even brings in the Account Statement. But, all these services come to you for a fee. Typically, agents charge a flat fee for these services.

Through IFAs: IFAs are independent Financial Advisors, who are individuals who act as agents to facilitate a mutual fund investment. They help you fill the application form and also submit the same with the AMC.

Directly with the AMC: You can invest in a mutual fund scheme by investing directly through the AMC. The first time you invest in any Mutual Fund, you may have to go to the AMC’s office to make your investment. Subsequently, future investments in different fund schemes of the same AMC can be made online (provided this facility is offered by the AMC) or offline, using the folio number in your name. Some AMCs may extend the facility of sending an agent to help you fill the application form, collect the cheque and send the acknowledgement.

Through Online Portals: There are several third party online portals, from where you can invest in various mutual fund schemes across AMCs. Most of the portals have tie-ups with banks to facilitate easy fund transfer at the time of investing. These portals charge an initial fee to setup an account and facilitate future smooth online access to invest and redeem your investments.

Through your bank: Banks are also intermediaries who distribute fund schemes of different AMCs. You can invest directly at your bank branch into fund schemes that you wish to invest in.

Through Demat and Online Trading Account: If you have a demat account, you can buy and sell mutual funds schemes through this account.

Electronic Money Transfer
The traditional way to transfer money from one bank account to another is to write a cheque and then deposit it. The advent of technology has ensured that one need not go through such a tedious process anymore. Over the years, the RBI has introduced several steps that has resulted in paperless transfer of funds through electronic funds transfer (EFT). There are several other acronyms that one comes across, especially when transferring funds online or through electronic clearances such as RTGS, NEFT, IMPS and ECS. Each of these plays an important role in ensuring your investments are timely and you do not lose time when investing. Each of these options plays a role in the way your investments are treated in a mutual fund.

Electronic Clearing Service (ECS): ECS is an electronic mode of payment or receipt for transactions that are repetitive and periodic in nature. For this reason, ECS is most preferred and useful when investing through SIP. Essentially, ECS facilitates bulk transfer of money from one bank account to many bank accounts or vice versa.

Primarily, there are two variants of ECS-ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.

ECS Debit is used by an institution for raising debits to a large number of accounts maintained with bank branches at various locations within the jurisdiction of an ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of mutual fund SIPs, because these are periodic or repetitive in nature and payable to the user institution by large number of investors.

National Electronic Fund Transfer (NEFT): This is a nationwide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals who do not have a bank account (walk-in customers) can also deposit cash (up to R50,000) at the NEFT-enabled branches with instructions to transfer funds using NEFT. At present, NEFT operates in hourly batches – there are eleven settlements from 9 AM to 7 PM on weekdays and five settlements from 9 AM to 1 PM on Saturdays.

Electronic Funds Transfer (EFT): This is a paperless method by which money is transferred from one bank account to other bank account without the cheque or currency notes. The transaction is done at bank ATM or using Credit Card or Debit card. In the RBI-EFT system you need to authorise the bank to transfer money from your bank account to other bank account that is called as beneficiary account. Funds transfers using this service can be made from any branch of a bank to any other branch of any bank, both inter-city and intra-city. RBI remains intermediary between the sender’s bank called as remitting bank and the receiving bank and affects the transfer of funds. Using this method, funds are credited into the receiver’s account either on the same day or within a maximum period of four days, depending upon the time at which the EFT instructions are given and the city in which the beneficiary account is located. Usually the transactions done in first half of the day will get first priority of transfer than the transaction done in second half.

Real Time Gross Settlement (RTGS): The real time gross settlement is an instantaneous funds-transfer system, wherein the money is transferred in real time. With this system you can transfer money to other bank account within two hours. In this system there is a limit that you have to transfer money only above R1 lakh and for money below R1 lakh transactions, banks are instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for high value clearing. The RTGS facility is available only up to 3 PM and inter-bank transactions are possible up to 5 PM.

Interbank Mobile Payments Service (IMPS) Facility: IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS allows existing unit holders to use mobile technology/instruments as a channel for accessing their bank accounts and initiating inter bank fund transaction in a with convenience and in a secured manner. It allows to invest 24*7 via mobile phone.

How does it work?

  • Unitholder needs to register for Mobile Banking with his Bank
  • The bank issues a unique MMID (Mobile Money Identifier) which is a combination of his bank account and bank code and also issues an M-PIN, a secret password.
  • Unitholder can now perform transaction using mobile banking application or SMS / USSD facility as provided by his Bank. For example: If unitholder wants to invest Rs. 10,000 in a mutual fund scheme using the mobile application, he needs to follow the following steps – In the mobile application; provide the
    • MMID of the scheme
    • His Mutual Fund Folio No.
  • Amount to Invest/transfer
  • MPIN issued by the bank remitting bank validates the details and debits the account of the Unitholder. It passes on the information to the beneficiary party (AMC in this case) via NPCI.
  • AMC shall, after validating the details, credit the folio/scheme account with the appropriate units and shall also provide an SMS/email confirmation to the Unitholder informing of the allotment

Unitholder should ensure that the Mobile number registered with Bank for IMPS facility is the same as mobile number registered with Mutual Fund for the folio.

Electronic payments
IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating or destination banks or branches and also to route the messages appropriately to the concerned banks or branches.

How to buy a mutual fund

A long read for the long weekend!

In case you are feeling lazy to read call me on 9999 321 868, I will help you get started with your Mutual Fund investments.

What you need to get started with Mutual Fund investing?
To start investing in a fund scheme you need a PAN, bank account and be KYC (know your client) compliant. The bank account should be in the name of the investor with the Magnetic Ink Character Recognition (MICR) and Indian Financial System Code (IFSC) details. These details are mentioned on every cheque leaf and it is common for an agent or distributor to seek a cancelled bank cheque leaf.

How to get your KYC?
The need for KYC is to comply with the market regulator SEBI in accordance with the Prevention of Money laundering Act, 2002 (‘PMLA’), which undergo changes from time to time.

KYC process is investor friendly and is uniform across various SEBI regulated intermediaries in the securities market such as Mutual Funds, Portfolio Managers, Depository Participants, Stock Brokers, Venture Capital Funds, Collective Investment Schemes and others. This way, a single KYC eliminates duplication of the KYC process across these intermediaries and makes investing more investor friendly.

Documents required to be submitted along with KYC application

  • Recent passport size photograph
  • Proof of identity such as a copy of PAN card or UID (Aadhaar) or passport or voter ID or driving licence
  • Proof of address passport or driving license or ration card or registered lease/sale agreement of residence or latest bank A/C statement or passbook or latest telephone bill (only landline) or latest electricity bill or latest gas bill, which are not older than three months.

You will need to submit copies of all these documents by self-attesting them along with originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorised for attesting the documents. In case you are unable to furnish proper documents, it could result in delays in getting a KYC.

Resident Indians can get it attested by: Notary public, Gazetted officer, Manager of a scheduled commercial or co-operative bank or multinational foreign banks. Make sure the name, designation and seal is affixed on the copy.

NRIs can get attestation from: Authorised officials of overseas branches of scheduled commercial banks registered in India, notary public, court magistrate, judge, Indian Embassy in the country where the client resides.

How to check your KYC status?
Existing investors and those who have submitted their applications can check the status on KYC compliance with their PAN number with any of the KYC Registration agency

Mutual fund application form
Each mutual fund scheme has a form that investors need to fill. If you start investing in the systematic investment plan (SIP), you need to fill in two forms: one to open an account with the mutual fund and the other to specify your SIP details such as frequency, monthly instalment amount, and date on which the SIP sum is to be invested.

Investing for Minors
If you wish to invest in the name of a minor, you need to fill in a third-party declaration form.

  • Only parents are allowed to invest on behalf of their children
  • Documents that establish the parent’s relationship with the child should be submitted (Passport, birth certificate or any other ID proof)
  • If the child has no parents in case of an eventuality, then a court-appointed guardian can invest if necessary documentary proof is submitted to establish the relationship between the minor child and the guardian

Growth, Dividend or Dividend Re-investment
When investing in mutual funds, there are three options that are available in which you could invest: growth, dividend and dividend reinvestment. One is normally expected to select one of the three options when filling an investment form, however, in case if you do not fill any of the option, the fund house selects the default option for the scheme as mentioned in its Scheme Information Document (SID), which is most often the growth option. Investors have the flexibility to change the investment option at a later date to suit their convenience.

Growth option: In this option, the scheme does not pay any dividend, but continues to grow. Therefore, nothing is received by you as a unit holder and hence, there is nothing to reinvest in the scheme. Any gains made by selling the fund holdings are invested back into the scheme, which can be seen in the NAV (net asset value) of the scheme, which rises over time. But, the number of units with the investor remains the same.

Dividend payout: In this option, the mutual fund scheme pays you from the profits made by the scheme at regular periods which could be monthly, quarterly, half-yearly or yearly in case of debt funds and at irregular intervals in case of equity funds. A liquid fund also provides for a daily or weekly dividend option. However, you should be aware that dividends are not guaranteed, which means a fund is not bound to pay out a dividend; it may or may not pay a dividend.

Dividend reinvestment: In this option, the dividend is not paid to you, instead it is reinvested in the fund scheme itself by buying more units on your behalf.

Each of the three options has its share of pros and cons, which will vary depending on your needs. As investors, the treatment of gains and taxes are the two essential features that differentiate these options. If evaluating the returns from an investment at a point of time, there is no difference among the three options. The difference emerges in an implicit form with respect to the applicable taxes.

Further, it is important to consider the tax impact when selecting between the growth, dividend payout or dividend reinvestment options as the post-tax returns’ differs between the options. This difference occurs because, the tax treatment is different for long-term and short-term holding period. The tax treatment also differs for equity and debt funds.

Capital Gains from Mutual Funds

Equity and Equity-oriented Hybrid Funds

Short-term holdings (less than one year) Long-term holdings (more than one year)
Taxed as short-term capital gains, currently 15 per cent Not Taxed
All Other Funds
Short-term holdings (less than three years) Long-term holdings (more than three years)
Taxed as per applicable marginal rate of tax 20% with indexation

Dividend Income from funds

Type of investment Dividend tax
Equity and Equity-oriented Hybrid Funds None
All Other Funds 25%*
* for individuals and HUF, plus surcharge as applicable and 3% education cess

Where and how to buy funds?
Like the many mutual fund schemes to choose from, there are several ways in which one can invest in them. One can invest online or offline or in direct as well as regular plans. Like everything else, each option has its limitations and advantages, which vary for each investor.

Direct Plan: Since January 1, 2013, all mutual fund houses have rolled out a new plan under all of their existing fund schemes-the Direct Plan. These plans are targeted at investors who do not make their mutual fund investments through distributors and hence have a lower expense ratio compared to existing fund schemes of the AMC.

This means that you, as an investor, will get an opportunity to earn a slightly higher return from your mutual fund despite it having the same portfolio. The direct plans will not charge distribution expenses or commission, resulting in these plans having lower annual charges and eventually, a different (higher) NAV compared to the regular plans.

Through intermediaries: There is a wide variety of intermediaries available. These include most banks, distribution companies having national or regional presence, some stock brokers (including online brokers) and a large number of individuals and small financial advisory companies. All intermediaries have to be registered with the Association of Mutual Fund in India (AMFI), which also maintains a searchable online directory at www.amfiindia.com. The website also lists intermediaries who have been suspended for malpractice to protect investors from going back to them.

The intermediary, normally brings the required mutual fund application form, helps you fill the forms, submit the forms and other documents to the Mutual Fund office and sometimes even brings in the Account Statement. But, all these services come to you for a fee. Typically, agents charge a flat fee for these services.

Through IFAs: IFAs are independent Financial Advisors, who are individuals who act as agents to facilitate a mutual fund investment. They help you fill the application form and also submit the same with the AMC.

Directly with the AMC: You can invest in a mutual fund scheme by investing directly through the AMC. The first time you invest in any Mutual Fund, you may have to go to the AMC’s office to make your investment. Subsequently, future investments in different fund schemes of the same AMC can be made online (provided this facility is offered by the AMC) or offline, using the folio number in your name. Some AMCs may extend the facility of sending an agent to help you fill the application form, collect the cheque and send the acknowledgement.

Through Online Portals: There are several third party online portals, from where you can invest in various mutual fund schemes across AMCs. Most of the portals have tie-ups with banks to facilitate easy fund transfer at the time of investing. These portals charge an initial fee to setup an account and facilitate future smooth online access to invest and redeem your investments.

Through your bank: Banks are also intermediaries who distribute fund schemes of different AMCs. You can invest directly at your bank branch into fund schemes that you wish to invest in.

Through Demat and Online Trading Account: If you have a demat account, you can buy and sell mutual funds schemes through this account.

Electronic Money Transfer
The traditional way to transfer money from one bank account to another is to write a cheque and then deposit it. The advent of technology has ensured that one need not go through such a tedious process anymore. Over the years, the RBI has introduced several steps that has resulted in paperless transfer of funds through electronic funds transfer (EFT). There are several other acronyms that one comes across, especially when transferring funds online or through electronic clearances such as RTGS, NEFT, IMPS and ECS. Each of these plays an important role in ensuring your investments are timely and you do not lose time when investing. Each of these options plays a role in the way your investments are treated in a mutual fund.

Electronic Clearing Service (ECS): ECS is an electronic mode of payment or receipt for transactions that are repetitive and periodic in nature. For this reason, ECS is most preferred and useful when investing through SIP. Essentially, ECS facilitates bulk transfer of money from one bank account to many bank accounts or vice versa.

Primarily, there are two variants of ECS-ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.

ECS Debit is used by an institution for raising debits to a large number of accounts maintained with bank branches at various locations within the jurisdiction of an ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of mutual fund SIPs, because these are periodic or repetitive in nature and payable to the user institution by large number of investors.

National Electronic Fund Transfer (NEFT): This is a nationwide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals who do not have a bank account (walk-in customers) can also deposit cash (up to R50,000) at the NEFT-enabled branches with instructions to transfer funds using NEFT. At present, NEFT operates in hourly batches – there are eleven settlements from 9 AM to 7 PM on weekdays and five settlements from 9 AM to 1 PM on Saturdays.

Electronic Funds Transfer (EFT): This is a paperless method by which money is transferred from one bank account to other bank account without the cheque or currency notes. The transaction is done at bank ATM or using Credit Card or Debit card. In the RBI-EFT system you need to authorise the bank to transfer money from your bank account to other bank account that is called as beneficiary account. Funds transfers using this service can be made from any branch of a bank to any other branch of any bank, both inter-city and intra-city. RBI remains intermediary between the sender’s bank called as remitting bank and the receiving bank and affects the transfer of funds. Using this method, funds are credited into the receiver’s account either on the same day or within a maximum period of four days, depending upon the time at which the EFT instructions are given and the city in which the beneficiary account is located. Usually the transactions done in first half of the day will get first priority of transfer than the transaction done in second half.

Real Time Gross Settlement (RTGS): The real time gross settlement is an instantaneous funds-transfer system, wherein the money is transferred in real time. With this system you can transfer money to other bank account within two hours. In this system there is a limit that you have to transfer money only above R1 lakh and for money below R1 lakh transactions, banks are instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for high value clearing. The RTGS facility is available only up to 3 PM and inter-bank transactions are possible up to 5 PM.

Interbank Mobile Payments Service (IMPS) Facility: IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS allows existing unit holders to use mobile technology/instruments as a channel for accessing their bank accounts and initiating inter bank fund transaction in a with convenience and in a secured manner. It allows to invest 24*7 via mobile phone.

How does it work?

  • Unitholder needs to register for Mobile Banking with his Bank
  • The bank issues a unique MMID (Mobile Money Identifier) which is a combination of his bank account and bank code and also issues an M-PIN, a secret password.
  • Unitholder can now perform transaction using mobile banking application or SMS / USSD facility as provided by his Bank. For example: If unitholder wants to invest Rs. 10,000 in a mutual fund scheme using the mobile application, he needs to follow the following steps – In the mobile application; provide the
    • MMID of the scheme
    • His Mutual Fund Folio No.
  • Amount to Invest/transfer
  • MPIN issued by the bank remitting bank validates the details and debits the account of the Unitholder. It passes on the information to the beneficiary party (AMC in this case) via NPCI.
  • AMC shall, after validating the details, credit the folio/scheme account with the appropriate units and shall also provide an SMS/email confirmation to the Unitholder informing of the allotment

Unitholder should ensure that the Mobile number registered with Bank for IMPS facility is the same as mobile number registered with Mutual Fund for the folio.

Electronic payments
IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating or destination banks or branches and also to route the messages appropriately to the concerned banks or branches.

Invest in debt mutual funds to protect yourself from falling interest rates

loss-thinkstockInterest rates are clearly on the way down. The State Bank of India has lowered the interest rate on savings bank accounts to 3.5%. Fixed deposit rates are still around 6.25% for most people but are surely headed lower.

This is a reduction of about 25% of what investors were earning on their fixed deposits just a couple of years back. Don’t be surprised if, in about a year or so, most banks are paying 3.5% on savings accounts and 5-5.5% on fixed deposits.

Since individuals park a big chunk of their money in these two types of savings, the fall in interest rates is a problem. Is there a solution? As it happens, there is. There are mutual fund products that fit the bill perfectly.

They not only give you higher returns than these banking products but also get taxed at a lower rate, making the effective return very attractive. The convenience is still not up to the level of a savings account, although it’s pretty close.

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