📘 12.1 Individual Investors
📌 Definition:
Individual investors are people who invest for their own personal benefit or for the benefit of their family. They typically invest smaller amounts compared to institutional investors, but they still play a crucial role in the mutual fund market. These investors are categorized based on their residency status and the type of accounts they hold. Below are the types of individual investors:
💡 Types of Individual Investors:
👤 Resident Indian Adults
These investors are individuals above 18 years of age, who invest either singly or jointly (with a maximum of 3 holders). They must be Indian residents.
👶 Minors
Investors who are under 18 years of age can invest through their parents or legal guardians. The parent/guardian acts on their behalf.
👨👩👧👦 Hindu Undivided Family (HUF)
An HUF is a traditional Indian family structure where the pooled family money is managed by a designated member, called the ‘Karta’. The Karta handles the investments on behalf of the entire family.
🌍 Non-Resident Indian (NRI)/Person of Indian Origin (PIO)
NRIs are Indian citizens working abroad, while PIOs are individuals whose spouse, parent, or grandparent is an Indian citizen. They can invest in mutual funds in India after fulfilling KYC requirements.
🌎 Foreign Investors
Foreign nationals who meet KYC requirements may invest in equity schemes offered by domestic mutual funds. However, they need to comply with regulatory guidelines for foreign investors.
💡 Additional Notes:
Individual investors are typically more risk-averse compared to institutional investors. However, they can choose from a wide range of investment options depending on their risk appetite and investment horizon. These investors are also governed by specific tax regulations, such as capital gains tax and dividend tax, depending on the type of scheme they invest in.
Example: An NRI living in the United States decides to invest in an Indian mutual fund’s equity scheme. They need to complete the KYC process and fulfill the documentation requirements before investing.
📘 12.2 Institutional Investors
📌 Definition:
Institutional investors are large organizations that invest in mutual funds on behalf of their clients, employees, or other stakeholders. These investors typically have more resources to conduct large-scale investments and are governed by specific regulations and guidelines. Below are the various types of institutional investors in India:
💡 Types of Institutional Investors:
🏢 Private and Public Companies
Companies set up under the Indian Companies Act, governed by the Memorandum of Association (MoA) and Articles of Association (AoA). These companies are managed by a Board of Directors.
💼 Partnership Firms
Firms set up by individuals coming together under a partnership deed, where profits and losses are shared as per the agreement.
👥 Association of Persons (AoP)
Groups of individuals who come together for a specific purpose as defined in their charter, with clear objectives and activities.
🏛️ Societies and Trusts
Organizations set up to pool individual contributions for managing funds according to specified objectives. Can be created for social, religious, educational, or charitable purposes.
🏦 Banks and Financial Institutions (FIs)
Banks are established under the Banking Regulations Act, while financial institutions are set up by an Act of Parliament or as corporations, often investing in mutual funds.
🌍 Foreign Portfolio Investors (FPIs)
Foreign institutional investors who are allowed to invest in Indian securities markets after obtaining FPI registration from SEBI.
🌎 Overseas Corporate Bodies (OCBs)
Organizations formed by NRIs or entities in which NRIs hold the majority stake. OCBs are currently prohibited from investing in Indian mutual funds.
💡 Additional Notes:
Institutional investors typically have greater market knowledge, more capital, and less regulatory burden compared to individual investors, allowing them to influence market trends. They often invest on behalf of a large pool of investors, such as pension funds, insurance funds, or large corporations.
Example: A pension fund may invest in Indian mutual funds as part of its diversified portfolio. It can make large investments across multiple schemes, including equity and debt funds, to achieve long-term growth for its beneficiaries.
📘 12.3 Investor Information and Documentation
📌 Definition:
Investors are required to provide specific documentation when investing in mutual funds. This documentation serves to verify the identity of the investor and ensure compliance with regulatory requirements. The type of documentation differs for individual and corporate investors. Below are the details of the required documentation for each investor type:
💡 12.3.1 Individual Investors:
📝 Name
The name of the investor is used to identify the person in whose name the investment has been made. The name must match the PAN card, as it is validated with the Income Tax database.
✍ Signature
Signature is used to verify the identity of the investor for every transaction. Valid transactions must carry the signature of the investor.
👨👩👧👦 Joint Holders
Up to three joint holders can invest in a mutual fund. All joint holders’ signatures are captured, and the mode of operation (either or survivor) is mentioned.
🏠 Address for Correspondence
The address enables physical identification. In case of NRIs, the overseas address is required, with the address of the first holder used as the correspondence address.
👶 Minors
For minors, the guardian invests on their behalf, and both the minor’s and guardian’s details are required. The minor’s age and documents must be provided to validate the investment.
🌍 Non-Resident Indian (NRI) Investors
NRIs must invest from an NRE or NRO account. They need to provide additional documents like a copy of their passport, overseas address proof, and Indian PAN for KYC compliance.
🏠 Hindu Undivided Family (HUF)
For HUF investments, the documents include the PAN of HUF and Karta, HUF deed with family details, and a cheque from the HUF bank account.
💡 12.3.2 Corporate Investors:
🏢 Copy of Memorandum and Articles of Association
This document must clearly specify that such investments are permissible under the corporate entity’s structure and business operations.
📑 Board Resolution
A formal board resolution is required to authorize the investment in mutual funds. It must be signed by the authorized signatories.
✍ List of Signatories
A list of all the authorized signatories along with their operating instructions must be provided to facilitate smooth transactions.
🆔 KYC Documents for Authorized Signatories
All authorized signatories must undergo the KYC process and provide their KYC documents to validate their identity.
Example: An NRI investor provides their passport, overseas address proof, and Indian PAN to complete the KYC process and invest in an Indian mutual fund scheme.
12.4 Know Your Customer (KYC) Norms
The government has implemented the Prevention of Money Laundering Act (PMLA) to ensure that illegal funds are not routed into Indian markets. Under this Act, the identity of individuals involved in financial transactions must be verified, which is known as the KYC (Know Your Customer) process.
12.4.1 Proof of Identity (PoI)
PAN (Permanent Account Number) is a mandatory identifier for all financial transactions. It serves as the single identification number for market transactions. If the investment is up to ₹50,000 per year per mutual fund, alternative photo IDs like Aadhaar, Passport, Voter’s ID, etc. can be used.
12.4.2 Proof of Address (PoA)
Proof of address can be any of the following Officially Valid Documents (OVDs): Passport, Aadhaar card, Voter’s ID, Utility bills, etc. If the address is outdated, supplementary documents can be used temporarily.
12.4.3 eKYC
eKYC is a paperless Aadhaar-based process to complete the KYC requirements. Investors can authenticate themselves with an OTP (One-Time Password), eliminating the need for physical verification. SEBI allows the use of this system for mutual fund investments.
Note: eKYC allows investors to complete their KYC process online using their Aadhaar number, PAN, and other personal details. This simplifies the process and eliminates the need for physical documents.
12.5 Power of Attorney
Investors can grant someone a Power of Attorney (PoA) to handle transactions on their behalf. This is typically useful for NRIs who are unable to manage their investments remotely. The PoA holder can make purchases and redemptions, and operate the investor’s bank account within the scope defined by the grantor.
Details of PoA
- PoA allows the holder to perform transactions on behalf of the investor.
- PoA holders must comply with PAN and KYC regulations.
- The grantor can still operate the account even after granting PoA.
12.6 Nomination
Investors can nominate someone to receive their investment proceeds in case of their death. The nomination can be made for up to 10 nominees. The nomination must be updated regularly to ensure smooth transfer of assets.
Details of Nomination
- Nominees can be minors, but their guardians must be provided for.
- Joint account holders cannot be the guardian of the nominee.
- Only individual investors can make a nomination.
12.7 FATCA and CRS Compliance
Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) are international standards for the automatic exchange of tax information between countries. Investors are required to provide details like place of birth, country of citizenship, tax residency, and Taxpayer ID number.
FATCA and CRS Reporting
Investors need to declare their tax residency status and provide their Tax ID number if they reside outside India. This helps ensure transparency in international financial dealings and prevents tax evasion.
12.8 Investor Charter
SEBI has issued Investor Charters that define the rights and responsibilities of investors and mutual funds. These charters ensure that investors are well informed about their investments and have avenues for redressal if issues arise.
12.8.1 Rights of Investors
- Right to receive detailed information about the scheme.
- Right to timely updates about NAVs, scheme performance, and reports.
- Right to redeem investments and receive proceeds on time.
12.8.2 Responsibilities of Investors
- Read scheme documents and understand the risks.
- Update KYC details and report discrepancies promptly.
- Ensure accurate and complete bank details for fund transfer.
