Mutual fund KYC: The hurdles and how to overcome them

Mutual fund KYC

On April 24, the five KYC Registration Agencies (KRAs) in the Indian Mutual Fund (MF) industry reported that nearly 73 percent of KYC (Know Your Customer) records are classified as ‘KYC validated’, 15 percent of KYC records as ‘KYC Registered’ and the balance 12 percent as ‘KYC On-Hold’ .

Although the 73 percent number looks impressive, investors, mutual fund distributors and investment advisers have been going through great hardships to get their KYCs validated.

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Moneycontrol was the first to report the KYC mess in a series of stories over the past few weeks. Moneycontrol has spoken with several distributors, advisors and fund house officials over the past few days to understand the perils that investors have had to go through, to get their KYCs validated. And where the obstacles lie in the journey to get their KYCs ‘validated’; the best form of KYC that you- the investor- have.

And here’s the challenge. Those whose KYC is classified as ‘KYC Registered’ must be updated to ‘KYC Validated’, if they wish to freely invest in fund houses where they have not invested so far.

KYCs fall in one of four categories; ‘KYC Validated (Aadhaar-based KYC, mobile and email validated; you can invest in any mutual fund house), ‘KYC Registered’ (Non -Aadhaar based KYC, mobile and email validated; you can only invest in fund houses where you are currently already invested, re-do KYC if you wish to invest in new fund houses), ‘KYC On-Hold (PAN-Aadhaar seeding was not done or email and phone are incorrect; you cannot do any MF transactions and you need to re-do your KYC) and ‘KYC Rejected’ (this is your KYC’s status if your ‘KYC On Hold’ status continues for 10-15 days; you cannot do any MF transactions and you need to re-do your KYC). Here are the minefields to avoid when graduating from ‘KYC Registered’ status to ‘KYC Validated’ status.

Why is Aadhaar KYC the best KYC

Although KYC is allowed with several documents, Aadhaar-based KYC allows you to do the KYC process just once, after which you can invest across all MFs, even if you haven’t yet invested in any of them. There’s a logic.

You can upgrade your KYC status through your mutual fund house

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To get your KYC validated, the mutual fund needs to verify, or cross-check, five things. Your name in your MF folio has to be as per your PAN (Permanent Account Number) card, your address has to be validated, Aadhaar has to be linked with PAN, email has to be verified and mobile number has to be verified. The key here is to be verified, which means that there needs to be a dispassionate way to verify the documents that you submit. Now, your email and mobile number can be verified if your fund house sends you an OTP (One-Time Password). PAN name also can be verified from the Income-tax website after your fund house sends a query. Same is the case if it wants to confirm your Aadhaar – PAN linkage. The challenge comes when your MF wants to verify your address. Here’s where only Aadhaar works. Your Aadhar is stored in the database of Unique Identification Authority of India (UIDAI), through DigiLocker; a government cloud-based platform for storage, sharing and verification of documents and certificates. Data stored on the DigiLocker is said to be authentic. “And only Aadhaar data – used as an address proof can get verified,” says the head of investor services at a fund house who did not wish to be named. Fund houses cannot pull other address proofs, say your passport details from the Ministry of External Affairs (the government ministry that issues passports), to cross-verify whether the proof you gave (in terms of printed document) if it is correct or fudged.

‘KYC – Registered’ investments might get delayed

If your KYC is ‘Registered’ (not ‘validated’), then you need to re-do your KYC every time you invest in a new fund house (fund houses you have never invested in so far). Here’s the problem.

Say, you are invested in two fund houses already. And you wish you to invest in three more fund houses for the first time. The ‘KYC Registered’ status entails that every time you give an investment application, you have to submit your KYC form and documents as well. In this example, you need to submit three KYC forms and documents; one set with each of your investment applications. The head of investor services quoted above explains that when any one of these three fund houses submits your KYC documents with the KRA (to verify your KYC documents), your KYC status immediately goes into ‘modification’ mode. This means that any other re-KYC application gets put on hold. In other words, the other two fund houses wouldn’t be able to process your KYC application till your KYC modification by the first fund house is complete. This, in turn, delays your investments. “Many investors cannot comprehend why their units haven’t been allotted even 3-5 days after submitting their application,” says an MF distributor who didn’t want to be quoted.

Is there a way out for NRI investors?

Non-Resident Indians (NRI) investors are stuck in two ways. It’s not mandatory for NRIs to have an Aadhaar. NRI investors without Aadhaar will see their KYC status stuck in ‘Registered’ category forever. This means that they need to re-do their KYC every time they decide to invest in a new fund house.

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For those NRIs who have an Aadhaar, mobile number verification will not work on their international phone numbers. They also need to have an Indian phone number with them. What’s the way out? “For starters, we are advising our NRI clients to apply for Aadhaar. But they can only do so when they visit India,” says Kiran Telang, a Mumbai-based Securities and Exchange Board of India-registered investment adviser.

For NRI investors who don’t have an Aadhaar (since it’s not mandatory), mobile verification is not necessary.

Rushabh Desai, Founder of Rupee With Rushabh Investment Services, says that if NRI investors have to re-do their KYC or even update their phone numbers in the KYC, they cannot do it online. They have to courier physical documents. One of his NRI investor clients who made a slight genuine error while filling his form as things were not mentioned with clarity in the KYC as per the new rules, has to once again fill the form and courier the same to him. “The address details that are asked on the form under ‘current address details are a bit confusing. Among many other address proofs it does not mention Aadhaar to be mandatory/compulsory and one can make a genuine mistake by ticking 'same as above' where by the overseas address would be captured from 'proof of identity and address'. Under ‘current address details’ or in 'proof of identity and address' it should clearly mention Aadhaar to be mandatory/compulsory,” says Desai.

Upgrade your KYC on your fund’s website

It is best to upgrade your KYC to ‘Validated’, if your KYC is ‘Registered’. The process is tedious, though. Here are some handy tips to ensure the process goes off smoothly:

You can upgrade your KYC status through your mutual fund house

Keep an e-scanned copy of your PAN. Use a scanner app, like CamScanner. Do not take a simple photo from your camera; this won’t work.

Keep your Aadhaar number and mobile number as registered with Aadhaar handy. Do note a liveness check would be done during this process, which would require you to use Camera and permissions, if any.

Your signature upload will be required along with an e-sign verification on the NSDL website. You can either ‘Live’ sign on the screen with your hand, or sign on a paper and take a photo, and upload that as a file, or simply take a photo of the physical signature.

You are allowed only a limited number of attempts in a day. If you exceed the number of attempts, you have to go back the next day to re-do your KYC.