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Aadhaar is back for mutual fund investments

Among the changes announced by the FM was one which was a surprise and a very pleasant one at that.

ET CONTRIBUTORS|
Updated: Sep 03, 2019, 12.03 PM IST
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Dhirendra Kumar2-1200
By Dhirendra Kumar

About ten days ago, the finance minister delivered a set of measures that were the first instalment of things that the government will do to boost the economy. It was an eclectic collection touching a variety of different areas but mostly along the expected lines. Certainly, it has had the hoped-for effect on at least the equity markets. More broadly, it has reaffirmed the belief that the current fog of pessimism is severely undersold and many individual problem areas will get fixed, some through direct action, some through second-order effects and others over a normal cycle.

Among the changes announced by the FM was one which was a surprise and a very pleasant one at that: the restoration of Aadhaar as a medium of KYC for mutual fund investments. This is not a new thing that has happened. Aadhaar was usable for this purpose, as it was for many other things, before the Supreme Court disallowed it in September last year. Subsequently, with the new Aadhaar law passed in July this year, it can be used again.

Aadhaar-based KYC is important because it brings investing into the digital age by making instant, seamless, paperless onboarding of new investors possible. To those who have been investors since an earlier era, this may look like a minor point. To a pre-digital person, it looks as if investing is something you are going to do all your life so how does it matter if the onboarding takes a few days instead of a few minutes. However, years of watching actual investor behaviour has shown me that making that first little step zero-friction is hugely important. Collecting three documents and physically submitting them is something that can result in a severe reduction in the number of young people who start investing at the right age.

Think of a youthful new investor, used to downloading an app or opening a website and getting everything done within minutes. Such an investor would be surprised to discover that face-to-face, physical verification and even paper forms and signatures are still the modus operandi for investing in mutual funds. To live in 2019 and do all this is more than a little ironic. In fact, I’m reminded of the 1991 IPO of Mastergain, a closed-end fund from the then Unit Trust of India that unexpectedly got 65 lakh applications in the middle of the strange bull market of that year.

These applications were paper forms which people queued up to first buy and then deposit. Banking, cheque clearing, record-keeping statements, unit transfers etc were all obviously paper-based even if some backends were computerised. A good number of investors had year-long problems because of faulty records and signature mismatches. Even at the time, it was obvious that complete computerisation and networking was the only way forward. And yet, if you had told me at the time that fully networked and computerised access to autorickshaws and restaurant meals would arrive in India before it would for mutual funds, it would not be available.

In fact, logically, even an Aadhaar-based KYC specifically for mutual funds seems like a step too short. Since banks are legally committed to providing foolproof KYC, all that is needed is to ensure that investments flow in and out of a bank account, which is already the case. This should be the default for all financial transactions. Instead, because of the way the anti-money laundering law works, each and every entity has to conduct its own KYC. Still, a one-step Aadhaar KYC is still a good option.

As long as a new investor has Aadhaar and a netbanking-enabled bank account, the onboarding and initial investment can happen quite quickly over a website or a mobile app. This may seem like a sideshow in the context of the government’s efforts to massage the economy, but for my money, it will eventually have an outsized impact on savings and investments.

(Dhirendra Kumar is the Founder & CEO of Value Research)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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