What Is Nomination? Why Should All Your Mutual Fund Investments Have It and How to Do It?

Do you think the efforts you are taking to build financial assets are worth it if your family is not able to claim them easily after your demise? To avoid such a situation, you should do a nomination for all your mutual funds and other investments. In this article, we will understand what nomination is, why you should do it for all your mutual fund investments and how to do it.

What Is Nomination in Mutual Funds?

Nomination is the process of appointing a person(s) to claim the mutual fund units held by you after your demise. Like mutual funds, the nomination can be done for all other assets like bank deposits, shares, real estate, EPF, PPF, insurance, etc.

If you are holding mutual fund units jointly with another holder(s), all the joint holders can nominate a person(s) to claim the units after the death of all holders. All joint holders have to nominate together, irrespective of the mode of account operation (whether 'anyone or survivor' or 'jointly'). In a joint account, if one of the holders dies, the units are transmitted to the surviving holders. In a joint account, only in the event of the death of all holders, the units will be transmitted to the nominee. 

Nomination is essential to ensure a smooth transfer of your assets from the AMC to the nominee(s) after your demise.

What Is Nominee ?

However, it is important to note that the nominee is just the caretaker or custodian of your assets. A nominee doesn't get the right of ownership. The ownership of your assets belongs to:

1. Beneficiaries mentioned in your will
2. Legal heirs, as per the succession laws, if you have not left behind any will

So, your job doesn't end just with nomination. Nomination is just half the job done. After nomination, make a will and mention how your assets should be distributed among the beneficiaries. On the unitholder's death, the transfer of mutual fund units to the nominee(s) shall be valid and effectual against any demand made on the AMC. It shall discharge the AMC of all liability towards the deceased unit holder's estate and his/her successors and legal heirs, executors and administrators.

Why Should You Do a Nomination in Mutual Fund?

As mentioned earlier, nomination ensures the smooth transfer of your assets from the AMC to the nominee(s) after your demise. The mutual fund units transfer to the nominee requires minimal documentation such as:

1. Duly filled transmission form (Form T3 – Request for Transmission of Units by Nominee or Legal Heir)
2. KYC documents of the nominee(s)
3. Proof of death of the unitholder
4. Duly attested signature of the nominee
5. Any other documents that may be required for transmission

Some of the benefits of mutual fund nomination include the following:

Smooth Transmission

Nomination ensures smooth transmission of assets without having to go through courts or any other legal procedures. It removes all doubts and uncertainty, thus making the distribution of units straightforward and hassle-free.

Quick Access to Money

Once the nominee makes the claim along with the required documents, the transmission happens quickly.

Inexpensive

Making a nomination or changing it is free of cost. The claim process involves submitting a photocopy of a few documents, which is quite inexpensive. Without nomination, if you have to go through a Court, it can be expensive.

However, if you don’t nominate, your legal heirs will have to claim your mutual fund units from the AMC. Without nomination, they will have a difficult time claiming your assets from the AMC as the process is lengthy, cumbersome, expensive, and involves a lot of paperwork. Hence, it is always important to make a nomination for all your assets.

How to Do a Nomination?

Nomination can be done at the time of making the initial investment application or anytime later. At the time of initial investment, you will need to fill in the 'nomination' section of the Account Opening Form (AOF).

If you have not made the nomination at the time of initial investment, you can do it any time later. You need to fill the Nomination Form and submit it either online or offline to the AMC or its Registrars. You can access the standard nomination form from the AMFI website at the following link: https://www.amfiindia.com/Themes/Theme1/downloads/MF-NominationForm.pdf

Important note: As per SEBI guidelines, all existing investors have to submit a choice of nomination for their demat accounts and mutual fund folios by 30th June 2024. For existing investments, the investor has to either make a nomination or explicitly mention that they wish to opt out of it. If the nomination deadline is not adhered to, the investor's account will be frozen for debits (you will not be able to redeem units). For new investments, an investor has to compulsorily either make a nomination or explicitly mention that they wish to opt out of it.

You can nominate one person or a maximum of three persons. When nominating more than one person, you must specify how the money should be distributed among the nominees. You have to specify the percentage of allocation/share of each nominee in whole numbers without decimals. The total of allocations/shares of all nominees should add to 100%. If you don't specify the percentage of allocation/share of each nominee, the AMC will make equal allocations to all nominees at the time of claim.

There is no expiry or validity date for existing nomination(s). It is for the lifetime till the unitholder modifies it or cancels it.

Modification of Existing Nomination in Mutual Funds

You can modify or delete the existing nomination at any time after the initial nomination. You can choose any modifications, such as:

1. Changing a single nominee to multiple nominees or vice versa
2. Changing the percentage of allocation/share of each nominee   
3. Removing the name(s) of existing nominee(s) and including new nominee(s)
4. Deleting the nominee(s) and opting out of it
5. Any other nomination modification that you desire, within the nomination rules

Any modification in the nomination will override the existing nomination, if any. Please note you have the option of opting out of nomination at the time of making the initial investment or anytime later. However, please note nomination is essential for a smoother transfer of your assets after your demise. Hence, you should always opt in for nomination.

The existing nomination modifications/changes can be made any number of times. The initial nomination, as well as subsequent modifications, are free of cost.

Who Can Nominate, and Whom Can You Nominate?

Nomination can be made only by individuals. Non-individuals, including a Society, Trust, Body Corporate, Partnership Firm, Karta of HUF, a Power of Attorney holder and/or Guardian of Minor unitholder, cannot nominate. Nomination is not allowed in a folio of a minor unitholder.

Nomination can be done in favour of:

1. Individuals like your family members
2. A minor (name and address of the Guardian needs to be provided)
3. Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust

Choose your nominee(s) carefully. Nominate those people whom you trust, who will transfer your assets to your intended beneficiaries. It is better to make a will and then nominate those who you have included in the will as beneficiaries of your assets.

What Happens on the Death of Nominee(s)?

If the nominee(s) dies before the unit holder’s death, the unit holder must modify the nomination. They can replace the name(s) of the nominee(s) who has died by adding new nominee(s).

What if Mutual Fund Units Are Held in a Demat Account?

If the mutual fund units are held in a demat account with a depository like NSDL or CDSL, the rules and bye-laws of The Depositories Act, 1996 will apply. You will have to submit the nomination details to the depository with whom you are holding the mutual fund units in the demat account. You can add nominee(s), modify, delete them or opt out of nomination. 

Make the Nomination for Own and Family Members’ Peace of Mind

In this article, we have understood what nomination is, why and how you should do it. Now that you know the importance of nomination, make sure you do nomination for your mutual fund units and all other assets. It will ensure a smooth transfer of your assets after your demise.

You have been working hard all your life to build assets. With the nomination, ensure your family members can enjoy the fruits of your efforts after your passing away. Also, don't just stop at nomination. Make a will detailing how your assets should be distributed after your demise. Preferably, you should appoint the will beneficiaries as nominees. Making a nomination and will is the key to the much-needed peace of mind for yourself and your family members.