Information on the precautions that have to be taken while writing out cheques when investing in mutual funds, and the recent rule changes on cheque validity are discussed in this article.
VALIDITY OF CHEQUES
In line with an RBI notification, the validity of all cheques, drafts, pay orders, banker's cheques is three months from the date of instrument with effect from April 1, 2012. Earlier, the validity of cheques and such instruments was six months. Investors in mutual funds must make sure that all dividend or redemption payments received through cheques are presented to their banks within three months of the date on the instrument for successful clearance.
A more efficient way to receive payouts is by registering for an electronic transfer to your bank account. It is safer, faster, and cost-effective to receive electronic transfers. Investors may register the IFSC codes with the mutual funds and opt for electronic payouts of dividend and redemptions.
FILLING CHEQUES
When applying for mutual fund units, care should be taken while filling out the cheque. The cheque amount, in words and figures, should match with the amount in the application form. Of course, the cheque should be dated correctly and signed, and the investment amount should be at least for the minimum amount mentioned in the scheme documents.
Writing a cheque incorrectly, or leaving a blank space for the signature could result in the cheque getting dishonoured; this would mean non-allotment of units and loss of the net asset value of the day. In addition, the bank may charge for cheque processing.
The fund and scheme name should be correctly mentioned on the cheque. At times, it has been noted that inadvertently, different scheme options are mentioned on the cheque and the application form.
THIRD-PARTY CHEQUES
As per Association of Mutual Funds in India guidelines, mutual fund investments made through third-party cheques will not be processed. A cheque issued by and signed by any person besides the first holder of the investment is a third-party cheque. When a payment is made from a bank account that is not held by the beneficiary investor, that is, the first holder, it is referred to as a “third-party payment”.
If the cheque is issued from a joint account, the first named applicant/ investor must be one of the joint holders of the bank account from which the instrument is issued. There are exceptions to the rule as mentioned below:
Parents: Payment may be made by parents/ grandparents/ related persons on behalf of a minor for a value which doesn't exceed Rs 50,000 (each regular purchase or per systematic investment plan instalment).
Employers: Payment may be made by employers on behalf of employees under systematic investment plans through payroll deductions.
Custodians: Payments made by custodians on behalf of foreign institutional investors or clients.
Such applications should be accompanied by the third-party declaration form, mentioning the relationship with the first holder. The form is available at mutual fund websites. Payments made by pre-funded instruments like a pay order, banker's cheque will be accepted if the instrument is accompanied with a certificate from the issuing banker stating the account holder's name and the account number which has been debited for issue of the instrument. The account holder's name mentioned in the certificate should be that of the first holder.
Alternately, investors may submit a copy of the bank statement evidencing the debit for the issuance of the instrument, or a copy of the acknowledgement from the bank wherein the instructions to debit the bank account are available. These should contain the bank account details and the name of the investor. The account number mentioned in these supporting documents should match with the one mentioned in the folio or the application form.
(Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. The views expressed herein are general practices in the mutual fund industry, and may vary on a case-to-case basis.)