You can invest up to Rs 50,000 in MFs in cash

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Now, you can invest up to Rs 50,000 a year in mutual fund schemes without a bank account. The catch is, you will need that bank account to redeem or receive dividend.

Market regulator Securities and Exchange Board of India (Sebi) has allowed investors to make cash transactions up to Rs 50,000 a year in mutual funds, up from Rs 20,000 permitted now. This will make things easier especially for investors in the hinterland.

One can now directly approach a branch of a mutual fund house or a distributor to invest that much in cash. Many fund houses have branches with skeletal staff in towns beyond the top 15 cities. Sebi has made no change in the norms for payouts, meaning they will have to necessarily go through the banking channel.

“The move is aimed at better financial inclusion and will enable a larger set of investors to participate in mutual fund schemes,” said Sundeep Sikka, CEO of Reliance Mutual Fund, India’s third largest fund house.

Sebi in a circular issued on Thursday said the norm is subject to compliance with the prevention of money laundering Act. In September 2012, the market regulator allowed cash transaction in mutual funds to the extent of Rs 20,000 per investor, per mutual fund, per financial year as part of measures initiated to re-energise the mutual fund industry.

Cash transactions were allowed to help enhance the reach of mutual fund products among small investors such as farmers, small traders, businessmen or workers, who may not be taxpayers and may have no PAN or bank account.

Jimmy Patel, CEO of Quantum Mutual Fund, said the move would help mutual fund penetration beyond the top 15 cities and would be beneficial for bank-sponsored fund houses, as those not having bank accounts would have to open them for redemption.

“For others, it will help rural penetration. But they will have to facilitate opening of bank accounts with no material gain. For them, this will be an additional avenue at a cost, as they will have to keep cash at their branches,” Patel said.

Allowing large cash transactions will require fund houses to handle huge amounts at branch level and manage the risk of forged notes. “AMCs like Peerless Mutual Fund, which have the basic infrastructure to accept cash, will have an advantage. But in general, it may mean an additional cost for fund houses,” said Patel of Quantum Mutual Fund.

“Even at the Rs 20,000 cash transaction limit, not many fund houses had gone for cash transaction, as it was believed to be risk-prone and involved procedural issues. But the Rs 50,000 limit will make it worth taking the risk,” said an official with a mutual fund house, who preferred anonymity.

“At Rs 20,000 limit, the cash transaction concept did not pick up in a big way. But enhancing the limit to Rs 50,000 seems to be a step in the right direction, more so as it comes with the revival of investor interest in the equity market,” said Himanshu Vyapak, deputy CEO of Reliance Capital Asset Management.

Vyapak said such transactions could be managed well, as the cash would be collected along with the KYC (know your client) data of the investor and the payback would anyway be done through the banking channel. Sebi recently found itself in knots in the Sahara refund case after the company was found to have collected cash deposits from several thousand investors.

Industry observers pointed to the risk that many such investments may leave no financial trail for any future audit, especially if fund houses go for large-scale small-ticket cash-based investments to shore up their numbers.

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