Financial markets today face a larger threat of suspicious activities that have a significant negative impact. As financial crimes continue to deeply impact financial markets across the globe, there is a growing need to implement stricter procedures while collecting information on customers.
As a move towards protecting institutions against financial threats, the Reserve Bank of India made it mandatory for all financial institutions to ensure complete verification of details of all customers transacting with them. Thus, to complete the verification, all individuals are required to follow the KYC procedure of the financial institution that they deal with.
Here, we will demystify KYC for new investors and explain why it is important for all those engaging in any form of financial activity.
What is KYC?
In India, KYC guidelines were first introduced by the RBI in 2002 and it was made a mandatory process from 2004 onwards for all banking institutions.
KYC or Know your customer, in simple terms, is the process of identifying a customer with an objective to detect and prevent any kind of fraud in financial transactions. KYC is mandatory since it is a legally binding process that all financial institutions have to follow.
Since its initial introduction, the KYC process has extended its application from banking and financial institutions to companies in different industries such as tech, Insurance, etc. The process itself has moved beyond just confirming a customer’s identity. Today, it includes verification of the identity of employees, distributors, and anyone who is employed in organisations.
KYC involves thorough verification of documents, such as, identity proof, address proof, etc. As a recent development, identity verification also forms a part of KYC due diligence conducted by all institutions.
List of documents accepted in KYC
For KYC procedure, the following list of documents is considered as OVDs (Officially Valid Documents) as per the Central Government.
- PAN Card
- Aadhaar Card
- Driving License
- Voter’s Identity Card
- NREGA Card
After collecting and verifying information on individuals and organisations, financial institutions pass it on to the KRAs (KYC Registration Agencies). KRAs are responsible for uploading all the gathered information in the central repository or database. In case of any changes to the information in the future, the relevant section gets updated.
When is KYC needed?
KYC is a must for customers before making any form of financial transaction for the very first time. For instance, banks mandate customers to file KYC while opening a bank account or if investing in fixed deposits. Additionally, all mutual fund investments too require KYC before initiating the investment process.
Why is KYC important?
Mentioned below are some of the reasons why KYC is an essential element while starting an investment process:
- Verification of truth and accuracy of customer identity
Financial institutions conduct business with multiple people on a daily basis. Before handling sensitive data around financial transactions, these institutions must check for the authenticity of the people and organisation’s identity. The KYC process helps these institutions in collecting sufficient evidence regarding the same.
- Avoid fraudulent transactions
KYC helps financial institutions avoid entering into transactions with persons or organizations with a history of corruption, who are politically exposed persons (PEPs), who have a criminal motive like terrorist financing, fraud, etc. Financial organizations who follow the KYC norms correctly can ensure the protection of their services against any form of misuse.
- Part of overall risk management strategy
Since KYC procedure helps in detecting the suspicious entities in advance, it is an effective mode of minimizing instances like money laundering, fraud, theft, etc in sensitive and important sectors like banking and financial services industry.
What are the types of Know Your Customer (KYC) while investing in mutual funds?
As per KYC regulations, every customer must undergo the KYC process at the time of opening an account with any financial institution.
Here are the three main types of KYC:
Aadhaar-based KYC can be done through the customer’s Aadhaar card details online. However, this process limits the amount of investment that a customer can make per year. For example, with Aadhaar-based KYC, an investor is allowed to invest up to a maximum of Rs. 50,000 per year per mutual fund. This limit is applicable if a customer does the KYC online. For those who complete the process offline, there is no limit on investment.
In-Person KYC verification is essential if a customer wants to invest additional amounts in a specific fund every year. For this, a customer has to visit a mutual fund house or a KYC Kiosk. In-Person verification can be done using the Aadhaar Card biometrics by requesting for the KRA (KYC Registration Agency) executive at home or office, as per one’s convenience.
Additionally, some mutual fund houses also let customers do their In-Person verification through a video call. In this case, the customer should display his/her original proof of identity and address containing pin code. After the In-Person Verification is completed, a customer can invest more than Rs. 50,000 per financial year.
How to become KYC compliant through Finity App
Here are the steps that users can follow to complete their KYC process while investing in mutual funds through the Finity app:
- Download and install the Finity app on your smartphone
- On the home screen, select ‘Mutual Funds’
- On the next screen that reads ‘Are You Investment Ready’ – click on ‘Check Now’ to see your KYC status
- Enter your PAN card number
- If the status result shows as ‘KYC is incomplete’ – click on Start KYC
- Click on continue and then enter your Aadhaar number before proceeding
- You will now receive an OTP on your Aadhaar-linked mobile number. Enter the OTP on the screen to proceed
- Click on ‘Allow’ to link your Digilocker
- Enter personal details as shown on the app
- Next, enter professional and nominee details
- You will then have to digitally sign to proceed to bank details
- Enter bank details and provide e-signature
- On the NSDL page, enter your Aadhaar number once again to receive an OTP
- Once you enter the OTP, your KYC process will be complete and you will be considered KYC compliant.
- And you can start investing immediately without any further wait.
The KYC process is essential for every investor who wants to conduct financial transactions with a bank, mutual fund house, or any other financial institution. Through the KYC verification process, a customer is essentially giving the financial institution the key information related to identity, address, and financial history. This will assure the financial institution that the customer will not engage in any illegal or money laundering activities that can hamper the institution’s set-up.
FAQs on KYC
Mutual fund houses generally have both offline and online KYC options for customers. For the offline process, customers can source the KYC form through the fund house or an intermediary and submit the documents physically. For the online process, customers need to log in to the respective fund house website and submit the required documents.
Yes, KYC can be done online. There are two modes of online KYC—through Aadhaar OTP and through Aadhaar-based Biometric KYC. Aadhaar OTP can easily be done within minutes, whereas Aadhaar-based Biometric KYC may involve some time. In the latter, after applying for KYC online, an executive from the KRA will visit the applicant’s home/office for biometric verification.
Yes. KYC is mandatory for all forms and quantum of investment in a mutual fund. Thus, customers must go through KYC for lump-sum investment and even Systematic Investment Plan (SIP).
To become KYC compliant, an individual or organisation has to fill in a KYC form online or offline. After submitting this and all the required documents, the KYC process gets completed, and the applicant becomes KYC compliant.
You can visit the website of CDSL (Central Depository Services Limited) at https://www.cvlkra.com/kycpaninquiry.aspxat to check your KYC status. The status can be checked using PAN number. The status will show as either ‘verified’ or ‘pending’ depending on the KYC process completion stage fulfilled by you.