Nominee vs Legal Heir: Who Has the Right to Your Mutual Funds?

Nominee vs Legal Heir: Who Has the Right to Your Mutual Funds?


SEBI has taken the important initiative of making people choose nomination for their mutual fund investments. Investors must either provide nomination details in the specified format or opt out of it with a prescribed declaration form. For existing assets, the deadline for nomination or opting out of it is 30th June 2024, post which the mutual fund folios will be frozen for debits.

Some investors feel mere nomination is enough for their succession planning. While nomination is important, it is half the job done. The nominee in mutual fund is only the caretaker. The actual beneficiaries are the legal heir(s). In this article, we will understand the roles of the nominee(s) and the legal heir(s), and who has the right to your mutual fund units. 

What Is Nomination?

Nomination is the process of appointing a person(s) who will coordinate with the AMC to take custody of your mutual fund units after your demise. The nominee(s) is only the caretaker or custodian of the mutual fund units. They don't get the legal ownership of the MF units. The nominee must pass on the mutual fund units to the person(s) who is legally entitled to the MF units. 

Who Is a Legal Heir?

A legal heir(s) is a person(s) who has the legal right to claim ownership of the mutual fund units and other assets of a deceased person. The legal heirs have the right to inherit the mutual fund units as per the succession laws. For example, in the case of Hindus, the Hindu Succession Act lays down the rules for the inheritance of assets of a deceased person. The legal heirs can deal with the mutual funds how they want, i.e. they can redeem them whenever they want. 

If the deceased person has made a will, the beneficiaries named in the will have the right to claim ownership of the mutual fund units. An individual can mention the details of how the assets should be distributed among the will beneficiaries. The individual can list the assets and who should get how much share of each asset. If there is no will, the provisions of the succession laws will apply for the distribution of mutual fund units of the deceased person. 

Is Nominee a Legal Heir?

Legal heirs have legal ownership rights over the deceased person’s assets, while nominees act as custodians without ownership rights. 

Importance of Nomination

You now understand that the ownership rights will go to the will beneficiaries or legal heirs as per succession laws (if there is no will). A nominee doesn't get ownership rights. However, the nomination is still very important. When there is a nomination, it is a straightforward process to claim the assets in the event of the mutual fund investor's death. The process is quick and inexpensive. Nomination ensures a smooth transfer of mutual fund units from the AMC to the legal heirs. 

However, if there is no nomination, it is not so easy for the will beneficiaries or legal heirs to claim the assets from the AMC. The process is time-consuming, expensive, and cumbersome. 

How Can Legal Heir Claim Money From Nominee?

When a bank account has a registered nominee, the transfer process after the death of the account holder becomes simple. The nominee must provide identification documents along with the death certificate of the deceased person to claim the funds. The bank then facilitates the transfer as per the nomination.

A Legal Heir Can Be Made a Nominee

In the earlier section, we discussed how the nominee has to take possession of the mutual fund units from the AMC and pass it on to the legal heirs. However, you can avoid the transfer of assets from the nominee to legal heirs by making the legal heirs as nominees. You can appoint up to three nominees. So, you can appoint up to three legal heirs as nominees and define the share of each of them in the nomination form. 

If you have made a will, you can make the will beneficiaries as nominees. The process will avoid the transfer of mutual fund units from the nominees to the beneficiaries. As per the succession laws, the family members as legal heirs are categorised into various classes. However, in a will, apart from family members, you can name anyone as a beneficiary, including friends, a loyal servant, or anyone else. 

Nominee vs Legal Heir: Who Has the Right to Your Mutual Funds?

In the event of the death of an investor, the nominee can claim the assets as a trustee or a custodian. They have to pass them to the legal heirs. The right to take ownership will be with the beneficiaries named in the will. In the event there is no will, the nominee will have to pass on the mutual fund units to the legal heir(s) as per the succession laws. 

The right of ownership will prevail with the legal heirs, not the nominees. In a scenario where the legal heir is a nominee, they can take ownership. 

How to Do Succession Planning?

You should make a will with the details of all your assets and how each asset should be divided among the beneficiaries. For example, suppose you want to give the mutual fund units to your daughter after your demise. You should mention it in your will. You can then appoint your daughter as the nominee in your mutual fund folios. In such a scenario, after your passing away, your daughter can claim the mutual fund units as a nominee from the AMC. Once she gets the MF units as a nominee, she can retain them as a will beneficiary. 

Prudent Succession Succession Planning: Peace of Mind for You and Your Family Members

In the earlier section, we saw how you can do prudent succession planning by naming the will beneficiaries as nominees. When you do that, you will have the much-needed peace of mind that your assets will go to the intended beneficiaries. Also, your family members will have clarity on who will get what. It will avoid family disputes and provide the family members also the much-needed peace of mind. 

Nominee vs Legal Heir Who Is a Legal Heir What Is Nomination

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