CH: 3: Assist With Purchase of Mutual Fund

3.1 The concept of financial planning.

What is Financial Planning?

Everyone has needs and aspirations. Most needs and aspirations call for a
financial commitment. Providing for this commitment becomes a financial
goal. Fulfilling the financial goal sets people on the path towards realizing
their needs and aspirations. People experience happiness, when their needs
and aspirations are realized within an identified time frame.

For example, a father wants his son, who has just passed his 10th standard
Board examinations, to become a doctor. This is an aspiration. In order to
realize this, formal education expenses, coaching class expenses, hostel
expenses and various other expenses need to be incurred over a number of
years. The estimated financial commitments towards these expenses
become financial goals. These financial goals need to be met, so that the
son can become a doctor.

Financial planning is a planned and systematic approach to provide for the

financial goals that will help people realize their needs and aspirations, and
be happy.

Alternate Financial Planning Approaches

The financial plan detailed above is a “goal-oriented financial plan” – a

financial plan for a specific goal related to the aspiration to make the son a
doctor.

An alternate approach is a “comprehensive financial plan” where all the

financial goals of a person are taken together, and the investment strategies
worked out on that basis.

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 The steps in creating a comprehensive financial plan, as proposed by the
Certified Financial Planner – Board of Standards (USA) are as follows:

 Establish and Define the Client-Planner Relationship

 Gather Client Data, Define Client Goals

 Analyses and Evaluate Client’s Financial Status

 Develop and Present Financial Planning Recommendations and / or

Options

 Implement the Financial Planning Recommendations

 Monitor the Financial Planning Recommendations The comprehensive

financial plan captures the estimated inflows from various sources, and
estimated outflows for various financial goals, including post-retirement
living expenses. The plan can go several decades into the future.

3.2 Process for purchasing the mutual fund.

While most AMCs (Asset Management Companies) now have online

platforms from where investors can buy mutual funds, a lot of beginners are
unaware of the steps they should follow.

 Steps to buying mutual funds

To begin with, let us first have a look at the crucial part of your first mutual
fund purchase process- completing KYC or eKYC.

 What is KYC or eKYC?

As per SEBI regulations, every new investor must complete either Know
Your Customer (KYC) or Electronic Know Your Customer (eKYC) process.
You only need to complete it once when you invest in mutual funds for the
first time.
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 If you are investing online, the eKYC process can be completed through
the fund house whose mutual fund scheme you select or by directly
visiting the online portal of KRAs (KYC Registration Agencies) like CAMS,
KARVY, NSDL or CDSL.

 eKYC

It is a simple online process that requires you to fill the eKYC form and
upload scanned images of your ID and address proof. Note that PAN
(Permanent Account Number) is mandatory for mutual fund investment.
You will also need your Aadhar-registered mobile number for completing
the verification.

 KYC

If you want to complete the KYC process offline, you will have to visit the
nearest branch office of the fund house you have selected. Request a KYC
form and fill the same before submitting it along with copies of your ID
and address proof.

It is also important to note that if you have ever invested in the past, you
might have already completed the KYC process. You can check it by
visiting the website of the KRAs listed above and entering your PAN. If you
are KYC compliant, you are not required to go through this process again.

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  Documents required to be submitted along with KYC application
o Recent passport size photograph
o Proof of identity such as a copy of PAN card or UID (Aadhaar) or
passport or voter ID or driving licence
o Proof of address such as passport or driving license or ration card
or registered lease/sale agreement of residence or latest bank A/C
statement or passbook or latest telephone bill (only landline) or
latest electricity bill or latest gas bill, which are not older than three
months.

You will need to submit copies of all these documents by self-attesting

them along with originals for verification. In case the original of any
document is not produced for verification, then the copies should be
properly attested by entities authorised for attesting the documents. In
case you are unable to furnish proper documents, it could result in
delays in getting a KYC.

 How to check your KYC status?

Existing investors and those who have submitted their applications can
check the status on KYC compliance with their PAN number with any
of the KYC Registration agency.

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  How to buy mutual funds online?

To invest in mutual funds online, the following steps must be taken:

o Visit the official website of the fund house whose scheme you are
interested in and click on the “Register New User” button.
o You will be redirected to a new page where you will be asked to fill
the registration form.
o You will have to enter details such as name, address, bank account
details, PAN, Aadhar number, etc.
o After entering the details, you will have to complete the eKYC
process, if you have not completed it already.
o Once the eKYC is done, it can take a few days for the fund house to
create a new account
o You will receive an email with your login details from your fund
house once your account is created.
o Login to your account, and you can find details of all the different
schemes offered by the fund house.
o Select the scheme of your choice and enter the investment amount
before completing the online payment.
o You can either make a lump sum payment or start a new SIP. It
can take up to 1 working day for the fund house to credit your
account with the fund units.

Resident Indians can get it attested by: Notary public, Gazetted

officer, Manager of a scheduled commercial or co-operative bank or
multinational foreign banks. Make sure the name, designation and
seal is affixed on the copy.

NRIs can get attestation from: Authorized officials of overseas

branches of scheduled commercial banks registered in India, notary
public, court magistrate, judge, Indian Embassy in the country where
the client resides.
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 Mutual fund application form

Each mutual fund scheme has a form that investors need to fill. If you
start investing in the systematic investment plan (SIP), you need to fill
in two forms: one to open an account with the mutual fund and the
other to specify your SIP details such as frequency, monthly
instalment amount, and date on which the SIP sum is to be invested.

 How to buy mutual funds offline?

If you want to go through the offline method, you will have to visit the
nearest branch office of the fund house. You can fill an investment
form and provide details like your name, address, PAN, Aadhar
number, etc. along with the details of the scheme you want to invest
in.

The payment can be made through cheque or demand draft. It can

take 4-5 working days for the fund house to allot the fund units to
your name.

Alternatively, the investment form, along with the cheque or demand

draft, can also be submitted at any of the POS (Point of Sale) of
registrars like CAMS or Karvy.

Even banks can help you start investing in mutual funds offline. You
can visit the nearest branch of your bank to know more. The
investment process through banks is also the same. You will have to
submit an investment form along with payment through cheque or
demand draft.

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3.3 Collect and ensure payments are processed at the bank/organization.

Payment Use cases in MF:

An investor can invest in Asset Management Company (AMC) directly by

opening account with the AMC (Aditya Birla, Mirae Assets etc.) or invest in
AMCs through MF-Aggregator (FundsIndia, Scripbox etc). So AMC and MF-
Aggregator need payment mechanism to facilitate investments.

Requirement 1: Support for SIP and ad-hoc purchase

 For SIP use-case, both online and offline recurring payment

solutions are used. Offline solutions: NACH and Online Solutions:
e-Mandate, e-NACH (now defunct)
 Ad-hoc purchases can be done with Payment Gateway (by
aggregator) or NEFT/RTGS transfer

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  Recurring solutions can be used cleverly for ad-hoc purchases.
Merchant can trigger debit on registered mandate (either paper
based or online) whenever investor wants to purchase MF.

Requirement 2: Credit cards (products) and wallets are not allowed

 Credit card are not allowed to buy MF as credit card is a short term
loan that may be invested in liquid funds so SEBI doesn’t allow
credit card
 Wallets can be loaded using a credit card and credit cards are not
allowed (SEBI guideline) thus wallets are not allowed
 Loopholes: One can withdraw cash using credit card and deposit it
in bank account or transfer wallet balance to the bank account.
Then bank account can be used for MF purchase. Although there
are deterrents for these methods such as high interest rates (on CC)
and bank transfer charges (for wallets) but at present there are loop
holes
 Future: SEBI is in process to allow MF purchase using wallets
provided source of wallet funding is bank account or debit card
(complicated to implement and not that useful)

Requirement 3: MF purchases to be done with registered bank account

 Payment solutions that use bank account as source of funds can be

deployed. Example: NACH, e-mandate, Payment Gateway (net-banking,
UPI, Debit Cards), NEFT/RTGS
 In recurring payment solutions (NACH, e-NACH, e-mandate) the account
validation can be done during mandate registration
 In case of payment gateway transactions using net-banking and UPI, the
account validation is done with TPV (Third Party Validation) flow. (TPV:
Registered account is passed as parameter and validated against

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 transaction account. TPV can be done during transaction (for 30+ banks)
and will be done in offline for remaining banks
 At present, there is no mechanism to validate account number of a debit
card during transaction so merchants that allow debit card transactions
are expecting investor to comply with guideline and passing the
liability/penalties (if any) to customers.

Requirement 4: Funds to be credited to AMC account (directly or

through nodal A/C)

 AMC/MF-Aggregator can pool the amount to nodal a/c and then credit
the relevant AMC’s account — Single settlement account will work
 To settle funds directly to AMC’s account, payment gateway has to
support scheme code integration. (Scheme code: every fund account
will be assigned with scheme code and that scheme code is passed
during transaction. Based on scheme code, settlement is done to
corresponding account)
 Settlement time for MF industry is T or T+1 depending on fund type.

Requirement 5: Entire investment amount should be credited to AMC

 Option 1: Merchant will bear the charges. But as charges cannot be

deducted upfront from investment amount so charges will be invoiced to
merchant
 Option 2: Surcharge the customer wherein customer will bear the charges
 For MF sector the charges will be Flat Fee (Recurring solutions always
work in flat fee. Even the PG charges of on net-banking, UPI and DC will
be in flat fee (Example: Rs.5 per transaction)

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 There are two main ways customer invests in MF.

A. SIP (Systematic Investment Plan): User can pay fixed amount on periodic
basis. This fixed amount can be increased or decreased. Both online (e-
mandate) and offline (NACH) recurring payment solutions are used.

B. Ad-hoc purchase: Investor can invest in a MF one time (ad-hoc basis).

Payment Gateway is pre-dominant solution for these transactions. Also,
recurring payment solutions can be used to run one-time debit on existing
mandates.

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  Few other aspects of MF industry:

A. Tertiary payment use cases of MF industry:

AMC/MF-Aggregator has other uses for payments such investor account

opening or advisory services. For such payments, typically payment
gateway or SI on Cards (monthly fees, if any) are used. And payments can
be done using any payment model (CC, DC, NB, wallets).

B. Success Rate:

We covered about importance or value of success rate earlier topics. In

case of MF merchants the success rate is not that critical as that for an
ecommerce company. Even if transaction fails, investor will retry again.
Having said that, it is always good if transaction goes through first time.

C. Payment Solutions in MF withdrawal:

When investor triggers Mutual Fund withdrawal or when AMC has to

distribute dividend then AMC pushes funds to customer’s account using
IMPS/NEFT/RTGS or NACH-Credit solutions.

 NACH-Credit solution allows merchant to push money to

investor’s account provided customer has set-up NACH
mandate.
 For cases where NACH mandate is not available then merchant
uses IMPS/NEFT/RTGS to push money to the registered A/C.

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3.4 Payment Mechanism for Purchase Mutual Fund.

Payments for mutual fund purchases need to be made through the banking
channel modes that have been approved by the regulators. The details of the
pay-in bank account have to be provided in the application form. These
acceptable modes of payments include:

 Cheque/Demand Draft (DD):

Application forms for fresh investment/transaction slip for additional
purchase is normally accompanied by cheque/demand draft drawn in
favour of the scheme in which application is to be made. In order to prevent
misuse of physical payment instruments mutual funds prescribe
precautions such as mentioning of the name/PAN number of the investor
and details of the scheme on the payment instrument. A separate payment
instrument should accompany each scheme/each plan. Cheques are
signed by the account holder, while DDs are signed by the banker.
Generally, DDs are accepted only if the investor is from a location where
there is no official collection center for the application.

 Electronic Modes of Payment:

Digital payment mediums or electronic payment mediums use digital
modes for making and receiving payments. There is no use of cash in
physical form and the payment cycle is completed online. Digital payments
provide advantages of ease and speed of payment process, safety of funds
and provide a record of funds usage. However, there is the risk of data
theft and some of the modes of payment may be difficult for a person not
comfortable with technology.

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  The Digital Payment Mediums available include the following:
 Internet Banking:
Internet banking is the most commonly used digital payment service. It
provides access to the banking services anywhere and at any time through
the official website of the banking institution.
Net banking allows fund transfers to own and third-party accounts, online
bill payments, online shopping and other such facilities that involves
making and receiving payments. The National Electronic Fund Transfer
(NEFT) facility allows digital transfer of funds between bank accounts. The
Immediate Payment Service (IMPS) is an instant interbank electronic fund
transfer available to registered users of banks through mobile phones, net
banking and ATMs.
Before money is remitted directly to the mutual fund, it is advisable to get
the proper bank account details from the AMC / distributor. The details of
the mutual fund, such as account number, account name, IFSC details
etc. are required to do an electronic transfer. Some mutual funds may
provide this information in the application form. The bank will generate a
unique transaction reference number. The acknowledgement from the
bank for the transfer request has to be appended along with the
application as proof of transfer. The account number mentioned in the
transfer instruction copy provided as proof should have the first holder as
one of the account holders.

 M-Banking :
Mobile banking has now become a convenient way for investment and
transaction purpose.

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  Unified Payment Interface (UPI):
The UPI allows fund transfer between accounts through the mobile app.
The users have to register for mobile banking facility to be able to use the
app. There are many UPI apps available such as BHIM, SBI UPI app, HDFC
UPI app, iMobile, PhonePe app, Aadhar app etc.
Which one can download on their phone. After the application (app) is
downloaded a Virtual Payment Address (VPA) has to be created by going
through an authentication process. This is like an email address and links
the UPI app to the user’s bank account through the mobile phone
registered with the bank. The VPA can be changed if so desired. Multiple
bank accounts can be linked to a VPA, but one account has to be
designated as the default account. To make payments using the UPI, one
needs the VPA of the payee. The user can also receive funds using the UPI.
A new version of the UPI allows transfer of funds using the Aadhaar
number instead of a VPA.

 Aadhaar Enabled Payment Service (AEPS):

AEPS allows bank to bank transaction using the Aadhaar number of the
customer. The Aadhaar number has to be linked to the bank account to
be able to use AEPS. The account holder can withdraw and deposit cash
and transfer money to another account linked to the Aadhaar number. The
AEPS uses the fingerprint of the individual as the password to authorize
transactions and is thus a secure mode of transfer of funds.

 Cards :
Cards are the most commonly used mode of digital payments. Debit cards
are issued by banks to their account holders and allow card holders to
carry out fund transactions linked to their bank account. Credit cards are
issued by banks and other approved entities and allow credit card holders

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 to use the card up to approved credit limits. Prepaid cards can also be
used to make card payments.
The cards are used by swiping it at the merchants’ PoS device. A PIN may
be required to confirm the transaction in case of a debit card. Online
payments can also be made using cards.

 E-Wallets:
E-Wallets are a virtual or digital version of the physical wallet. Money is
loaded to the E-Wallet and used as required to make payments and
transfer funds to other E-Wallets. However, they cannot be used to transfer
money to a bank account. Using the E-Wallet does not require a PIN or
Password which makes them susceptible to unauthorized use by anyone
who can get access to the mobile phone on which the Wallet is stored.
Paytm, State Bank Buddy, ICICI Pockets and FreeCharge are commonly
used E-Wallets. Digital payments such as Net Banking, Debit cards, UPI
are amongst the accepted modes of payment for mutual fund schemes
currently.

 Cash Payments:
Mutual funds usually do not accept cash. Small investors, who may not
be tax payers and may not have PAN/bank accounts, such as farmers,
small traders/businessmen/workers are allowed cash transactions for
purchase of units in mutual funds to the extent of Rs. 50,000/- per
investor, per mutual fund, per financial year. This is subject to compliance
with Prevention of Money Laundering Act, 2002 and SEBI Circulars on
Anti Money Laundering (AML) and other applicable AML rules, regulations
and guidelines.

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3.5 Understand the different types of funds available in the market.

1) Types of Mutual Funds in India Based on Fund Structure:

 Open Ended Funds: These are the funds available for investors for
investment and redemption throughout the year, meaning any investor
can buy or sell the fund at the prevailing NAVs. This fund allows investor
to take action based on his will. There is no limit on the purchase and sell
of the fund by the investor. The fund is usually active and therefore usually
a Fund Manager to take care of the fund and its movement. There is also
a fee associated with the fund.

 Close Ended Funds: As the name suggests, these funds are close ended
in nature meaning investors can buy the mutual fund only in a specific
period and units can be redeemed at maturity of the investment. These
funds are usually listed on exchanges and usually these funds are sold
through exchanges at the prevailing price.

 Interval Funds: Interval funds have features and characteristics of

both open-ended funds and close ended funds. Interval funds are available
for purchase at different intervals during the tenure.

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 2) Types of Mutual Funds in India Based on Asset Class:

 Equity Funds: These funds are meant to invest in equities of companies.

Return of the fund is highly correlated to market equity movement in
general

 Debt Funds: These funds invest in debt instruments such as bonds,

debentures, zero coupon bonds, government securities etc. Due to the
nature of their investments, debts are safer than equity funds and are
known to provide stable returns.

 Money Market Funds: These funds invest in liquid instruments like

treasury bills, CPs etc. These funds are also considered safe as these funds
invests in money market which is not directly linked to equity markets

 Balanced or hybrid Funds: These funds are a mixture of different asset

class funds. Depending on the liking of fund houses.

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 3) Types of Mutual Funds in India Based on Investment Objectives:

 Growth Funds: These are the funds which invests in equities which have
good growth potentials. Such stocks give good capital appreciation.

 Income Funds: Such funds invests in Fixed income instruments like

bonds, debentures with a purpose of giving good returns to investors with
zero to less risk

 Liquid Funds: In this funds , investments are done in liquid funds to get
returns in the short term

 Tax saving Funds (ELSS): Such funds invests in stocks which satisfy the
requirements set by Income tax department. Investors usually invest in to
get the tax benefit in the form of tax exemption

 Capital Protection Fund: The purpose of this fund is to provide protection

to the capital invested. This is done by partly investing fixed income
instruments and equity markets. The funds ensure that the principal is
protected against uncertainties

 Fixed Maturity Funds: In this, money is invested in money market and

the debt instruments and one significant feature is that the maturity date
is either the same as that of the fund or before the maturity of the fund.
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  Pension Funds: Pension funds usually have a goal of investing money for
longer term with an objective getting good returns. The fund usually have
both risky as well as capital protection nature.

4) Types of Mutual Funds in India Based on Specialty:

 Sector Funds: These are sector specific funds meaning fund is invested in
a particular sector so auto sector fund will invest in instruments related
to auto sector

 Index Funds: This kind of fund is usually invested in index on an

exchange, the purpose is to leverage on the movement of the indices which
are a bit easy to predict.

 Fund of Funds: These funds invests in other mutual funds and the return
is dependent on the performance of the fund in which the money is
invested in. Sometimes this is referred as the multi manager fund as
multiple managers are connected to performance of the fund of funds.

 Emerging Market Funds: These funds usually invest in emerging market

after assessing the future growth opportunities. These investments could
be risky in nature as the political and economic situation may not be stable
over there.

 International Funds: These funds usually invest in companies which are

located internationally meaning that the fund won’t invest in companies
which are located in investor’s own country

 Real Estate Funds: These are the funds that invest in companies which
are in the real estate sector. Funds can invest in realtors, builders, project
management companies and even in loan providers.

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  Commodity Focused Stock Funds:

 Market Neutral Funds: Funds invest in treasury bills, ETFs and securities
and try to target a fixed and steady growth meaning the funds don’t invest
directly in the markets.

 Inverse/Leverage funds: These funds are 180 degree opposite of what a

traditional Mutual Funds are, these funds earn when the market is in red
and these funds incur losses when the market is up.

 Asset Allocation Funds: There are two type of Asset allocation funds, the
target date funds and the target allocation funds. In these funds, managers
vary the proportion of investment to achieve the result.

 Gift Funds:

 Exchange Traded Funds: These are the funds that have the exposure of
both the open and close ended mutual funds and are traded on the stock
exchanges. These funds generally have a lot of liquidity.

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 5) Types of Mutual Funds in India Based on Risk:

 Low Risk: The fund possess low risk and therefore people who like to
have low return and want to take less risk tend to invest in such funds.
The time frame of investment is usually long term. Such Funds prefer debt
market instruments and Government securities. Typical gift funds can
come under it.

 Medium Risk: Funds which offer moderate risk and moderate returns
come under this category. Such Funds generate wealth for investor over a
longer period of time.

 High Risk: These are those funds which offer higher return for the higher
risk exposure. Wealth creation is opportunities always exists for investors
but these tend to be a bit risky in nature.

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