Chapter 9: Investor Services — Comprehensive Study Notes

This guide provides exhaustive short notes for Chapter 9 of the NISM Series V-B: Mutual Fund Foundation Certification Workbook. It covers the end-to-end lifecycle of investor services, from initial offerings to complex financial and non-financial transactions.

9.1 The New Fund Offer (NFO) Process

A New Fund Offer (NFO) is the first time a mutual fund scheme offers its units to the public.

Key Steps in the NFO Lifecycle

1. Decision & Strategy: The Asset Management Company (AMC) decides on a scheme category (must be a category where they don't already have an existing fund, unless it's a Sector, Index, or FoF category).
2. Document Preparation: The AMC prepares the Scheme Information Document (SID), which requires approval from the Trustees and the Board of Directors.
3. SEBI Filing: The SID is filed with SEBI. Observations made by SEBI must be incorporated before the issue.
4. Marketing & Distribution: The AMC launches advertising campaigns (complying with SEBI’s code) and holds events for intermediaries/press.
5. Application Collection: Application forms and KIMs are circulated through distributors and Investor Service Centres (ISCs).

Critical NFO Dates

• NFO Open Date: The first day investors can apply.
• NFO Close Date: The final day to invest in the NFO. NFOs (other than ELSS) can remain open for a maximum of 15 days.
• Scheme Re-Opening Date: (Open-ended only) The date from which ongoing purchases and redemptions resume at the applicable NAV.

9.2 NFO and Ongoing Offer Prices

• NFO Price: Typically, units are offered at a face value of Rs. 10 per unit during the NFO period.
• Ongoing Price: The price at which units are bought or sold after the NFO. Since entry loads are banned, the Sale Price is equal to the applicable NAV. The Repurchase (Redemption) Price is the NAV minus any applicable Exit Load.

9.3 Investment Plans and Services

Direct vs. Regular Plans

• Regular Plan: For investments routed through a distributor. It has a higher Total Expense Ratio (TER) to account for distribution commissions.
• Direct Plan: For investors who invest directly with the AMC. It has a lower TER because no commission is paid.
• Note: Both plans have separate NAVs due to the difference in expenses.

Investment Options (IDCW vs. Growth)

1. Growth Option: No dividends are declared. The value of the gains is reflected in the NAV. The number of units remains constant unless the investor buys or sells.
2. IDCW (Dividend) Payout: The fund declares a dividend from profits. The NAV falls by the extent of the dividend. The investor receives the dividend in their bank account.
3. IDCW (Dividend) Re-investment: Instead of receiving cash, the dividend amount is used to buy additional units of the same scheme at the ex-dividend NAV.

9.4 Allotment of Units to the Investor

• NFO Allotment: Must be completed within 5 business days after the NFO closure. If the units are not allotted and the money is refunded after 5 days, the AMC must pay 15% p.a. interest for the delay.
• Bonus Issue: New units are allotted for free (e.g., a 1:3 bonus). While the number of units increases, the NAV falls proportionately, so the total value of the holding remains unchanged.
• Demat Allotment: For investors opting for demat mode, units are credited to their demat account within 2 working days of allotment.

9.5 Account Statements for Investments

1. Monthly Statement: Issued if there was a financial transaction during the month.
2. Annual Statement: Provided to unit-holders who have not transacted for six months.
3. Consolidated Account Statement (CAS): A single statement sent via post or email that details holdings across all mutual funds for a specific PAN. Sent monthly if there are transactions, or half-yearly (September/March) for inactive folios.

9.6 Mutual Fund Investors: Eligibility

Individual Investors

• Resident Indian adults (singly or jointly, max 3).
• Minors: Must invest through a guardian (parent or court-appointed). Joint holding is not allowed for minors.
• HUF (Hindu Undivided Family): The Karta invests on behalf of the family.
• NRIs/PIOs: Can invest on a repatriable or non-repatriable basis.

Non-Individual Investors

• Companies, Societies, Religious/Charitable Trusts, Partnership Firms, Banks, and Foreign Portfolio Investors (FPIs).
• Crucial Document: They must provide a Board Resolution authorizing the investment and a list of authorized signatories.

9.7 Filling the Application Form

Key sections of the application form include:

• Plan Selection: Must specify "Direct" or the distributor's ARN for "Regular".
• Bank Details: Mandatory to provide the account number, branch, and IFSC/MICR.
• FATCA/CRS: Mandatory for investors whose tax residency or place of birth is outside India.
• Nomination: Investors are encouraged to nominate up to three people.

9.8 Financial Transactions and Payment Mechanisms

Common Financial Transactions

• Purchase: Initial or additional investment.
• Redemption (Repurchase): Selling units back to the AMC. Units are redeemed on a FIFO (First-In-First-Out) basis.
• Switch: A combined transaction of redeeming from one scheme and purchasing into another within the same AMC.

Payment Modes

• Electronic: Internet Banking, UPI, NEFT, RTGS, IMPS, and NACH.
• ASBA (Application Supported by Blocked Amount): Only for NFOs; funds stay in the investor's account and are only debited upon allotment.
• One-Time Mandate (OTM): A one-time registration allowing the AMC to debit a specified amount from the bank for future purchases.
• Cash: Accepted only for small investors up to Rs. 50,000 per investor, per mutual fund, per year.
• Third-Party Payments: Generally not accepted, with exceptions for parents/grandparents (up to Rs. 50,000), employers (payroll deduction), and custodians for FPIs.

9.9 Cut-off Timing and Time Stamping

Cut-off timings determine which day's NAV an investor receives.

Time Stamping: All physical applications must be time-stamped at Official Points of Acceptance (OPoAs) using tamper-proof machines.

9.10 KYC Requirements for Investors

KYC (Know Your Customer) is mandatory for all investors under the Prevention of Money Laundering Act.

• Documents: PAN card (Identity proof) and Address proof (Passport, Voter ID, etc.).
• PAN Exemptions: Micro-SIPs and small investments up to Rs. 50,000 per year are PAN exempt but still require KYC using a PEKRN.
• Central KYC (cKYCR): Managed by CERSAI; once KYC is completed with one intermediary, it is valid across the financial sector.
• In-Person Verification (IPV): A mandatory part of the KYC process where an official verifies the physical presence of the investor.

9.11 & 9.12 Systematic Transactions

1. SIP (Systematic Investment Plan): Investing a fixed amount at regular intervals. It benefits from Rupee Cost Averaging.
2. SWP (Systematic Withdrawal Plan): Withdrawing a fixed amount or units regularly. Helps in managing regular cash flow needs.
3. STP (Systematic Transfer Plan): Regularly transferring a fixed amount from a source scheme (usually Debt) to a target scheme (usually Equity).
4. DTP (Dividend Transfer Plan): Automatically investing the IDCW earned in one scheme into another scheme of the same AMC.
5. SIP Top-up: Facility to increase the SIP installment amount periodically (fixed amount or percentage).

9.13 Non-Financial Transactions

• Nomination: Up to 3 nominees. Nominees hold units in trust for legal heirs; it does not grant them absolute ownership.
• Pledge/Lien: Units can be pledged as security for loans. Pledged units cannot be sold or switched without the lender's NOC.
• Change of Bank Details: Investors can register up to 5 bank accounts (10 for non-individuals). One must be designated as the default for payouts.
• Transmission: Transferring units to surviving holders or nominees in the event of a unit-holder's death.

9.14 Change in Status of Special Categories

Minor turned Major (MAM)

Upon turning 18, the minor’s account is frozen. To reactivate it:

• The erstwhile minor must complete fresh KYC and provide a new PAN with their signature.
• Signature must be attested by a banker.
• All standing instructions (SIP/SWP) are suspended until the status is updated.

NRI to Resident

Returning Indians must:

• Close NRE/NRO accounts and open Resident Rupee accounts.
• Inform the AMC/RTA and update KYC status to "Resident".
• Open a new demat account with "Resident" status if holding units in demat mode.

9.15 Investor Transactions — Turnaround Times (TAT)

SEBI prescribes strict TATs for various services:

• NFO Allotment/Refund: Within 5 business days of NFO close.
• Redemption Payouts: Typically within 3 working days (T+3) for most schemes, though regulatory limits allow more. [Refer to source section 9.15 for specific details].
• CAS Despatch: By the 21st day of the following month.

Important Terms for the Exam

• ASBA: Application Supported by Blocked Amount.
• FIFO: First-in-First-out (Method used for redemption).
• IPV: In-Person Verification (Mandatory for KYC).
• OPoA: Official Points of Acceptance.
• Rupee Cost Averaging: The effect of buying more units when prices are low via SIP.
• UBO: Ultimate Beneficial Owner (Requirement for institutional investors).