Some mutual fund houses allow investors to open an account jointly with a maximum of three account holders. Although one may consider this as a convenient way for two or three individuals to pool a larger sum for investment purposes, the operation of a joint mutual fund account is not as simple as a joint bank account.
There are many aspects you need to consider and weigh the pros and cons before deciding to do so.
How does joint holding work in mutual funds?
The decision to allow such a holding rests in the hands of the Asset Management Company (mutual fund house). If the fund house allows it:
- The joint holding has to be established at the time of application. Some AMCs allow the addition of the account holders at a later stage as well.
- All the applicants need to be KYC compliant and hold a PAN.
- Investors get to chose between 'joint' and 'either or survivor' mode of joint holding. When the mode of holding is not selected, the mutual fund account is treated as a 'joint' account by default.
- In the case of 'joint' holding, all investors are treated as equals and all financial or non-financial requests have to be agreed to and signed by all the holders. In 'either or survivor' holding, any one of the holders can complete the formalities.
- Request or cancellation of nomination needs to be signed by all the joint holders, irrespective of mode of holding.
- The nominee only gets the rights after death of all the account holders.
- Minors are not allowed to hold joint mutual fund accounts.
- The equal authority of joint holding allows investors who wish to hold control over the investment to make sure that any of the account holders do not take a unilateral decision without another's consent.
- It helps with easy transfers of mutual fund units on the death of one of the account holders. They will be transferred to the remaining account holders on submission of death certificates and other formalities as specified by the AMC.
- The "either or survivor" mode is helpful for those that wish to transfer the ownership to their spouse on their death. The investment decisions will remain with the first holder until his/her death.
- The process of buying and selling transactions becomes cumbersome as it will require signatures of all the account holders. It will be especially difficult for documentation purposes if one of them decides to move to a different city or country.
- Any minor change, like a change in the communication address, will also require the consent of all the account holders, delaying the documentation process for the AMC.
- Only the "first holder" of the account gets the communication regarding the payments, dividends, etc. Same goes for taxation purposes as well. Only the first holder is allowed to claim any exemption on income tax in case of tax saving funds like ELSS (under section 80C). The tax implications of short term or long term capital gains from the fund are also to be borne by the first holder only.
- The rights of the surviving joint holder(s) are superior to that of the nominee at the time of the death of a joint holder. A nominee will only be entitled to the units on the death of all the joint holders.