The recent consultation paper by Securities & Exchange Board of India (SEBI) points out that 70% of the demat accounts with a single holder have opted out of appointing a nominee. This observation from the Sebi has triggered a discussion about the importance of nomination in an investment. Let us understand why nomination in investments is important and how it can be done wisely:
The Sebi has been vocal about investors appointing a nominee to their investments or to clearly ‘opt out’ of the nomination if they are not keen to nominate anyone. In the past, the Sebi has stated that failing to mention a choice would lead to freezing of investments held in mutual fund folios as well as demat accounts. Deadline set for this exercise has already been extended three times and the revised deadline now is: June 30, 2024.
The statistics about demat accounts with a single holder opting out of nomination is a caveat for all stakeholders, which include investors as well as financial intermediaries. It has been observed that sometimes investors in a hurry to open a demat account online choose the option of ‘opt-out’ of nomination. Intermediaries need to educate investors at the time opening of account and also after the account opening about the need for nomination. In the case of the demise of an investor whose investments do not have nomination, the transmission of assets happens only when a probated Will, letter of administration or succession certificate is presented. This is a lengthy process. The survivors or legal heirs of the deceased investor not only pay emotionally but also monetarily.Investors who have not yet appointed nominees in their demat accounts or mutual fund folios should approach their stock brokers and fill up the form to affect a nomination. It is neither time-consuming nor does it have any cost. An investor who has chosen to ‘opt out’ of a nomination during the opening of a demat account can appoint a nominee any time in future. Investors, who have done so, can reconsider their decision and appoint a nominee by writing to their stock broker.
Appointing a nominee to a demat account and mutual fund folio ensures that the transmission process becomes easier when an investor dies. To be sure, a nominee is a custodian of assets after the demise of the investor. In the case of joint holding, the joint holders derive the rights and interest of investments. Hence, in the case of jointly-held investments, many times investors opt not to appoint a nominee. However, in an investment, be it a mutual fund folio or a demat account especially held in a single name it is advisable to appoint a nominee. For the uninitiated, a nominee comes into the picture only after the death of an investor in whose name the investment is held. A nominee has no right on investments in the lifetime of an investor. Importantly, an investor can change a nominee as many times investor wants. Also, a Will prevails over a nomination made.
While nominations can help transfer of financial investments to the nominee (who is the custodian of the assets concerned), real estate and other assets can be transferred smoothly using a Will. Estate planning is a necessity for all those who own assets. A well-drafted Will can help transmission of assets to those whom one wants to bequeath one’s assets. For mutual fund folios, registrar and transfer agents sent out SMS sensitising investors to register their nominations or opt out. At present, investors have specified a nominee in case of 85% of the mutual fund folios with a single holder.At the end of the day, we must value what we have created. And this journey of valuing what we have created does not end with our life. In fact, this journey becomes all the more precious when we are not there. And to ensure that our assets receive their due respect and value, we have to hand it over to able and trustworthy hands. And nominations make it happen.
