Transfer of Mutual Fund Units: Everything You Need to Know
3 October, 2024
Synopsis:
Mutual fund units generally cannot be directly transferred between individuals, except for the original investor's death.
Investors can transfer mutual funds platform to another through an "in-kind" transfer process, avoiding potential tax implications.
Mutual fund units can be moved to a demat account offline or online.
The restrictions on transferring mutual funds exist to protect the interests of investors and prevent unlawful activities in the market.
Mutual funds are potential wealth creators, unlike assets like property and gold, gifting whereas transferring your mutual funds is possible under exceptional circumstances. So, what do you want when you want to change your investment strategies or want to ensure that they're passed on to your loved ones? Moving mutual fund investments is governed by strict rules and regulations. Let's do a deep dive into the mutual fund transfer process.
Can Mutual Funds be transferred?
Transferring mutual funds can be complex, but understanding the rules and procedures can help you manage your investments more effectively. Let's break this down into two main categories:
Transfer to Another Individual
A transfer of mutual funds involves moving ownership or control of mutual fund units from one investor to another.
The thumb rule is that mutual fund units can't be directly transferred to another person except in the case of the first applicant's death.
If one of the applicants dies, the units are transferred to the other registered co-applicants. If the deceased was the only applicant, the units are transferred to the nominee or the legal heir.
In both cases, the death certificate of the deceased must be submitted, in addition to completing other formalities.
Suppose you want to gift mutual fund units to your minor son or daughter on his or her birthday, then you can buy units in your child's name as a guardian.
Transfer Between Brokers
While you can't freely transfer mutual fund units between people, you can move your investments from one broker to another. Here's how:
Choose an "in-kind" transfer to avoid selling and repurchasing shares, which could have tax implications.
Get a transfer form from your new broker.
Fill out the form with details about your current holdings and broker.
Submit the form and settle any outstanding fees with your current broker.
Wait a few days for the transfer to complete.
Remember to check for any exit load fees from your current broker or processing fees at the new one before initiating a transfer.
Transferring Mutual Funds to a Demat Account
You can also move mutual fund units into a demat account. This can be done offline or online:
Offline method:
Get a Conversion Request Form (CRF) from your depository participant (DP).
Fill out the CRF with your details and the mutual fund information.
Submit the form and your mutual fund account statement to your DP.
The DP will process the transfer with the fund's registrar.
Online method:
Log into your demat account online.
Go to the mutual funds section and select the transfer option.
Choose the fund and number of units to transfer.
Select your demat account as the destination.
Review and submit the request.
Transferring Mutual Funds After the Demise of an Investor
In case of the primary investor's death, mutual fund units are transferred through a process called transmission. Here's how the process works:
With a co-applicant: Units are automatically transferred to the co-applicant.
Without a co-applicant: Units are transferred to the nominee or legal heir, after submitting the death certificate and relevant documents.
Nominating a beneficiary is now mandatory when investing in mutual funds. If a nominee is not specified, investors must submit a written declaration. Required documents for transmission typically include:
Death certificate of the deceased
KYC details of the nominee or legal heir
New bank account details
Indemnity bond (for larger amounts)
Specific requirements may vary depending on the mutual fund house and the number of unit holders.
Switching Mutual Fund Schemes Within the Same Fund House
Switching between mutual fund schemes within the same fund house is a simple process known as a "switch." This allows you to move your investment from one scheme to another, such as switching from an equity-focused scheme to a debt-focused one, without hassle. You can do this through a Systematic Transfer Plan (STP). Unlike moving funds between different fund houses, switching within the same fund house is usually smooth and doesn't incur exit loads or capital gains tax.
Why Can't You Freely Transfer Mutual Fund Units?
The restrictions on transferring mutual funds exist to protect investors and maintain market integrity. Allowing free transfers could potentially lead to misuse, such as money laundering or tax evasion.
Additionally, mutual funds are designed to be easily bought and sold in the open market. The fund houses argue that there's no need for direct transfers when units can be easily sold and repurchased.
When to Consider Moving Your Mutual Funds
While you can't freely transfer mutual fund units, there are situations where you might want to move your investments:
Switching to a better-performing fund
Changing your investment strategy (e.g., moving from equity to debt funds)
Reducing costs by switching from regular to direct funds
Consolidating your investments with a single broker
Remember, these moves typically involve selling and repurchasing units rather than directly transferring.
Things to Consider Before Moving Mutual Funds
Before making any changes to your mutual fund investments, consider the following:
Exit loads: Some funds charge a fee if you sell within a certain period.
Tax implications: Selling units may trigger capital gains tax.
Transaction costs: Check for any fees for selling or buying units.
Your investment objectives: Ensure any changes align with your financial plan.
It's often wise to consult with a financial advisor before making significant changes to your investment portfolio.
While mutual funds can't be freely transferred between individuals, there are still ways to move your investments when needed. Whether switching brokers, consolidating your portfolio, or planning for the future, understanding the rules and processes around mutual fund transfers can help you manage your investments more effectively.
Remember, the key to successful investing is choosing the right funds and knowing how to manage them over time.
Ensure that your nominee details are always up-to-date to avoid complications in transmission. For easy management of your mutual fund portfolio, use tools such as the HDFC Bank SmartWealth App to keep track of investments.
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