The popular saying, “a stitch in time saves nine” may well apply to mutual fund (MF) investments as well. There are quite a few details you need to remember while filling out your MF form-choosing the right option and so on. These small details, if ignored, may come to haunt you later. We tell you three things to watch out for when investing in MFs.
Should you nominate or opt for a second holder?
Every MF investment offers you an option to add a second and a third holder’s name. Additionally, or as some of us feel, alternatively, investors can also nominate their near and dear ones who can receive the proceeds if the first holder dies. Many investors choose to do both; have a second account holder and nominate someone else.
Legal experts believe that if you wish someone to get the money in case of your untimely death, it’s better to put that name down under a second (or even third) holder’s name as against nominating him. “The nominee plays the role of a trustee,” said Uday Wavikar, vice-president, consumer court advocates bar association for Maharashtra and Goa. “If there is no second holder, the nominee has a right to your money, but s/he has to go through a lengthy process such as getting a probate on a will (if there is one) and has to get a succession certificate.”
While the nominee is like a trustee, a joint account holder is always a joint owner, he added.
In other words, if there are two or more account holders in a single folio and if the mode of holding is “either/or survivor”, the second holder can do various things with the folio, such as switch from one scheme to another or even withdraw. “Even if the second holder withdraws, the money still goes into the bank account that belongs to the first account holder,” said Amar Pandit, a Mumbai-based financial planner and chief executive officer, My Financial Advisor, a financial planning firm. However, once you put down second and/or third holder names it’s ideal to nominate someone else too, to complete your succession formula.
Of liquid funds and residue amounts
Often we forget and abandon our liquid funds once our systematic transfer plan (STP) gets done. STPs are a mechanism whereby you invest a lump sum in a debt fund, usually a liquid fund, and then systematically transfer equal sums of money to an equity fund of your choice. It works just like a systematic investment plan (SIP); only in an SIP, money comes to your equity fund from your bank account. When the STP tenor gets over and money gets transferred, you’d think that your liquid fund is wiped out clean and all the action has shifted to your equity fund. Not quite.
Your liquid fund earns returns of up to 4-7% on average per annum. Even if you stay invested for a day, it earns a bit. While your balance in liquid goes down, it also keeps earning returns bit by bit. Say, you invest Rs 50,000 in a liquid fund on January 1 2012 and enroll in an STP where Rs 10,000 gets transferred to an equity fund every month. Assume that your transfer date is the 7th of every month. You’d think that after your last transfer on May 7, your liquid fund should get completely wiped out (R10,000 x 5 months). It doesn’t; you still have Rs 647.10 left in your liquid fund, assuming that it earns 7% returns annually.
To an extent, this problem has got mitigated because most liquid funds these days have a minimum balance requirement, like a savings bank account.
The moment your balance falls below this minimum threshold, the fund house may send you a reminder and nudge you to withdraw. For instance, DSP BlackRock Investment Managers Ltd has prescribed a minimum balance of Rs 500 for the retail plans of its liquid fund. “The problem of a residue amount remaining in your liquid fund after an STP gets over doesn’t exist as the minimum amount criterion concept is inducted for every transaction,” said a senior official of Karvy Computershare, a registrar and transfer firm. “Even after STP, if any residual is left over (only when the investor chooses STP of a fixed amount and not the capital appreciation option) that will be transferred to your equity fund by default.” Most fund houses, however, stick to sending reminders.
When SIP and lump sum amounts don’t match
In around October 2011, a reader tried to start a four-year SIP with IDFC Premier Equity Fund. He wanted to invest Rs 4,000 as his first SIP installment and Rs 2,000 subsequently for the remaining installments. A practice followed by most AMCs, it allows investors to put a lump sum or initial investment usually done to open an account and then allows the SIP to start with a monthly installment amount he chooses.
After three weeks, IDFC Asset Management sent him a letter stating that his SIP request is rejected because it no longer allows a different investment amount for the first and subsequent installments. He had to fill a fresh form again, by which time another fortnight passed by. “IDFC Premier Equity is one of those rare equity schemes where we don’t allow lump sum investments all the time; that window is only open periodically,” said a fund official on the condition of anonymity. “But SIPs are always allowed. We found that many investors in the past took advantage of differential SIP (a different SIP amount for the first installment and a different for the remaining) and put in large sums of money as their first installment. They used this as a backdoor entry to invest lump sum money. Hence, we discontinued this facility.”
IDFC AMC’s logic is valid, but investors-like our reader-get inconvenienced. Old forms that allow the investors to put two separate amounts are there in the market. We got one such copy (Common Lumpsum Cum SIP Application Form) ourselves, from the fund’s website as late as January 6. A senior Cams official said that among all funds it services, some allow differential SIP and some don’t. “It is not a uniform practice followed by all fund houses,” he said.
“Such variations are usually spelt out in the key information memorandum. However, for all fund houses, a person can open an account by investing say Rs 5,000 and after a week or so initiate a stand-alone SIP (that could be different from the initial investment amount),” he added. In short, check with the agent or the fund house before investing.