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Can a company invest in mutual funds?


In the last couple of decades, the mutual fund industry in India has been flourishing. The average assets under management (AUM) for the industry grew from Rs. 149 thousand crores in March 2005 to Rs. 1,082 thousand crores in March 2015. This means the average CAGR during this period was 21.93%.

Why are mutual funds so popular?

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The reason why mutual funds are increasing in popularity is that they offer attractive returns to the investors along with the option of taking a passive role in the investment process. It addresses the primary problem that individuals encounter when they start investing in the stock market – which company’s stock should they buy?

Mutual funds offer a very neat solution – the responsibility of handling the investment process is entirely handed over to a dedicated fund manager, who tracks the portfolio and looks after the entire pool of money as a whole.

Mutual fund investments have been increasing in popularity among individuals for the last decade or so. There is, however, something, that a lot of people are not aware of – non-individuals can also invest in mutual funds. Companies, high-net-worth individuals (HNIs), etc., mutual funds are meant for them all.

Of course, the requirements of these different groups are different.

How can retail investors and companies invest in mutual funds?

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Individuals have the luxury of knowing their income sources, and they can budget their expenditure, investment, and savings accordingly. Thus, individuals generally opt for equity funds, growth funds, hybrid funds or even debt funds. They make use of the Systematic Investment Plan (SIP) option to invest a small amount every month, and grow their long-term nest egg.

However, companies generally do not have the luxury of planning out their investment and expenditure amounts in advance. Their expenditure depends on the revenue that comes in. Most companies cannot opt for the SIP option or even for growth and equity funds, because they cannot write-off that amount of money from their available cash resources. It may so happen that a sudden unexpected expenditure may crop up, that requires immediate cash attention.

This is the primary reason why companies keep their cash in current accounts in banks. It is to ensure that if any unexpected expenditures do crop up, they will have the required liquidity to deal with it.

This liquidity, however, does not come without a price.

As we all know, “there ain’t no such thing as a free lunch”.

In this case, the price takes the form of the 0% interest that is levied on current accounts. This means, whatever cash that companies keep in current accounts, does not earn them anything.

Ironically, this is an opportunity lost.

What if we could offer you a free lunch?

What if there was a way through which companies could get the best of both worlds? What if there was some way which combined the liquidity requirement of companies and gave them higher returns than what is provided by current accounts?

Thus, we come to the subject of liquid funds.

What are liquid funds?

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Primarily debt funds, these mutual funds invest the clients’ money in short-term securities whose maturity ranges from 3 days to 3 months. These funds allow clients to withdraw their money within a week of investment and provides them with interest for the amount invested.

For example, imagine that the yearly growth provided by a particular fund is in the region of 6%. This means, if you invest Rs. 1 crore for a time period of 1 month, the amount of interest earned will be Rs. 50,000.

This Rs. 50,000 that you earn will be in exchange for nothing. If you had kept that same amount in a current account, you would have earned Rs. 0 in return.

Now that you have the facts with you, tell me, which option would any rational company choose?

The options, in this case, are – to earn Rs. 0 by doing nothing, or to earn Rs. 50,000 by doing nothing.

Bit of a no-brainer, isn’t it?

How can companies invest in mutual funds?

Now, that is the million-dollar question.

We know that if individuals want to invest and they want to know more about the investment process, they can simply go online and look up one of the million instructional blogs or videos. Unfortunately, the same plethora of information is not present for corporates. There is not much spelt out about what documents may be needed, what approvals may be required before a firm can invest in a mutual fund.

That is where this article comes in.

We will take this opportunity to provide a complete guide for the process through which companies can invest in mutual funds.

Now the first thing is to choose a platform for investing. In this regard, firms can choose to either approach an AMC (asset management company) directly and invest in one or more of their mutual fund schemes. The other alternative is to go for a mutual fund distribution platform, which can provide access to multiple AMCs across the board and a more varied set of choices.

The latter option is recommended especially if you are unsure of which AMC to choose. A distribution platform offers ease of investing and you can compare the different features offered by the different AMCs before settling on the ideal choice.

Our guide will start with a mutual fund distribution platform.

Documents Required for Companies to Invest in Mutual Funds

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The first step will be to create an account and verify your email and phone number. Once you have registered with your contact details, you will be able to begin the investment process.

The second step is to check your KYC compliance status.

KYC stands for Know Your Customer.

This step is part of the guidelines issued by the Securities and Exchange Board of India (SEBI). It is part of SEBI’s efforts to enforce the Prevention of Money Laundering Act, 2002, and also part of a larger effort to ensure transparency in financial transactions and weed out frauds and illegal activities.

In this step, you will have to provide certain details about the company, namely, a list of authorized signatories, records of your company accounts, balance sheets, shareholding pattern, a list of authorized signatories and a copy of the memorandum from the board resolution approving the investment decision.

Of course, this process is a lot simpler for an individual. In that case, there is no board resolution required. The individual would simply have to sign on the declaration form and it would be done. However, since a company operates differently, to signify the consent of all the directors of the company, a board resolution for investment in a mutual fund by a private company is required.

Fulfilling the KYC requirements are a prerequisite for investing in mutual funds – without complying with these requirements, you simply cannot invest.

Now, if you are KYC compliant, you can directly proceed to the next step.

The third step is to verify your official email and phone number. These should be the official contact details that are part of your KYC.

The difference between the first step and the third step is that in the former, you can simply signup using any phone number and email address. In other words, these details do not need to be your official contact details.

The paperwork will begin after you have completed your KYC verification. In the subsequent steps, you will be required to fill in a series of forms with regard to the onboarding process, the additional KYC (this is only required for companies, not individuals), the FATCA (Foreign Account Tax Compliance Act) declaration and the UBO (Ultimate Beneficial Owner) declaration.

The fourth step involves the onboarding process. This is equivalent to the application form that you have to fill out while registering with an AMC. Here, you will have to provide a few details with regard to the tax status, net worth and the bank details of your company.

Once you have completed the entire onboarding process, you can now proceed to the FATCA and the UBO declaration.

The fifth step deals with the FATCA declaration that is required by companies.

As mentioned above, FATCA stands for the Foreign Account Tax Compliance Act. This act is meant for residents and citizens of the United States. It is meant to address the issue of tax evasion. Accordingly, FATCA serves to track the foreign bank accounts and investments of US residents and companies.

Now, the question at this point is, why should the requirements of a US act come into an investment in India?

As this act deals with bank accounts in foreign countries, the US has entered into agreements with several countries. India signed the Inter-Governmental Agreement in July 2015. Under the terms of the agreement, this information is collected by the Indian tax authorities. It is then transmitted to the US authorities at periodic intervals.

This part of the documentation process is based on a simple premise – is your company FATCA compliant?

If your company does not have any business with the US, then this act will not apply to you. Whatever your status maybe, you simply have to declare it here.

The sixth step in this process deals with the UBO or Ultimate Beneficiary Owner. This step, in fact, is mandatory for companies.

You see, when you invest as an individual, it is very easy to simply assign you as the owner of the units or shares that you are purchasing. There is no doubt or confusion about the ownership of the securities.

However, when the securities are being bought by a company, the question of ownership comes up. The company is simply a vessel. So, who do the shares go to ultimately?

The beneficiaries are generally the owners or promoters of the company. The securities could be assigned to other individuals as well, but all that information has to be declared before the investment process commences.

The UBO forms require the name, address and PAN number of the different beneficiaries of that investment account.

The seventh step in this process relates to the documents required. Here, the basic documents that will be required are a cancelled cheque from your company bank account, a copy of the board resolution and the list of authorized signatories.

Apart from that, the forms that you filled up with regard to FATCA and UBO will have to be sent to the mutual fund distributor, sealed and stamped with the company seal. This step is in accordance of the guidelines set forth by NSE (National Stock Exchange).

At this point, I have some good news and some great news for you.

The good news is that we are at the end of the documentation process. After this, all that remains is the time that will be taken to verify your details and your documents. The great news is that this is a one-time process. You will never have to go through this again.

That is our solemn promise.

Once your account is ready, you will receive a notification from your distributor. Then, you simply choose the scheme that tickles your fancy and get started.

Happy investing!

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