When are third-party payments allowed for MF investments?

Investments made into mutual funds have to adhere to the best practices guidelines issued by capital markets regulator Securities and Exchange Board of India (Sebi) and the Association of Mutual Funds in India (Amfi) to be compliant with the Prevention of Money Laundering Act, 2002, and know-your-customer (KYC) norms. One of the requirements is disallowing third-party payment for mutual fund transactions.

A third-party payment for a mutual fund investment is one where the payment is made through a bank account that does not belong to the first or sole holder of the folio. If the bank account is held jointly, then the first or sole holder of the mutual fund folio has to be one of the joint holders of the bank account, but not necessarily the first holder. The mode of holding of the bank account, whether jointly or either or survivor, does not matter.

But there are a few exceptional cases where mutual funds allow third-party payments. We tell you about those and the process to follow to be able to make such payments.

the Exceptions

There are certain specified situations in which payment from a third-party bank account may be accepted.

One, payments made on behalf of minor investors by parents, grandparents and related persons up to a limit of ₹50,000 for each purchase, either as lump sum or as an instalment for a systematic investment plan (SIP). The said persons need not be the registered guardians of the minor investor.

Two, payments made by an employer on behalf of an employee through payroll deductions or deduction of expense reimbursements is also exempted from this rule.

Other cases include payments made by a custodian on behalf of a foreign portfolio investor (FPI) or client and payment of commission or incentive made by a company to its agents or distributors for the sale of its goods and services in the form of mutual fund investments.

the Process

Where the payment is being made through a third-party account under a permitted transaction, the KYC formalities must be completed both by the investor on whose behalf the payment is being made as well as the person making the payment. This has to be done irrespective of the amount of payment.

The person making the payment must also give a declaration giving the details of the relationship with the beneficiary and the bank account from which the payment is being made. Other information such as Permanent Account Number (PAN) details, contact information and so on also need to be provided.

Typically, mutual funds provide a prescribed third-party payment declaration form in which such information has to be provided.

Applications for mutual fund units that do not meet the specified payment guidelines are liable to be rejected. It is important that the information being provided is correct and is supported by relevant documents.