Assume that you want to add your spouse or child to your existing mutual fund folio. Can you do that? Did you know that most fund houses don’t allow you to add another name in your existing folio. But at least two fund houses—SBI Funds Management Pvt. Ltd and Quantum Asset Management Co. Pvt. Ltd—allow you to add an additional holder.
Mint asked a mix of 15 fund houses, whether they allow this facility.
Is transfer a sale?
Most fund houses told us that they don’t allow an additional name as it amounts to a transfer of a mutual fund investment. All such fund houses say that mutual funds are non-transferable securities. Section 37(1) of the Securities and Exchange Board of India’s (Sebi’s) Mutual Funds Regulations, 1996, says that units of a mutual fund are transferable, unless restricted or prohibited under the scheme or “by operation of law.” In simple words, Sebi has allowed fund houses to take a call on it. Most fund houses prohibit transfer and say so in their Scheme Information Document.
But does adding a second or third holder amount to a transfer? Yes, say most fund houses. They say that in the eyes of law, all unitholders are equal holders where their names feature. Fund houses like Quantum Asset Management and SBI Funds Management say that the first unitholder gets all the benefits.
Same goes for the income tax benefits. A mutual fund folio may have three joint holders, but any capital gains tax benefit accrued by unitholder on sale of such units, gets accrued to the first unitholder. Hence, adding a second or third holder doesn’t tantamount to a transfer, say the two fund houses mentioned above. A senior official from SBI Funds Management said that it follows banking principles. He said that if you can add an account holder in a savings bank account, there is no reason why mutual funds shouldn’t allow this.
The head of a compliance of a large fund house, though, told us that in the eyes of law, all unitholders must be treated equally. If, for instance, he says, a husband is the first unitholder and wife is a second unitholder and there is a divorce and the wife puts a claim, the matter might land up in court.
Another chief executive officer of a small fund house said that such addition or deletion of additional names have not yet been tested legally, so fund houses are cautious.
What you should do
The fund houses that do allow you to add an additional unitholder have prescribed a process to do so. For instance, Quantum AMC has forms for this on its website. Consent of all existing unitholders is a must and all new additions must also be compliant with the Know-Your-Client regulations. The form needs to be stamped by way of franking amounting to Rs300.
SBI Funds Management does not require any such franking.
If you hold units with other fund houses that don’t allow it, you have no choice but to invest afresh. Or, if you hold such units in demat form, you can open another demat account with the new account holders and transfer all units from your old demat account to the new one, using the off-market transfer process. Your depository participant will help you.