Mutual fund inheritance rules: Can your children lose out despite being nominees? Here’s what parents should know

Naming your children as nominees for mutual fund investments does not necessarily guarantee that they will inherit the money. Under Indian succession law, a nominee generally receives the investments from the asset management company (AMC), but the ultimate ownership depends on the investor’s valid will or, in its absence, the applicable succession laws.

This means a child named as the sole nominee may have to share the inherited investments with other legal heirs. Conversely, a child who is not named as a nominee may still be entitled to a share of the investments under a will or succession law.

Aditi Sharma, partner at Khaitan & Co, said nomination is a mechanism to facilitate the transfer of investments after an investor’s death and does not automatically confer legal ownership on the nominee.

“The nominee is akin to a custodian of the account,” Sharma said, adding that the legal heirs or owners would be those identified in the deceased’s will or under the applicable succession law.

Anshuman Jagtap, partner at Economic Laws Practice, said the Supreme Court’s judgment in Shakti Yezdani v. Jayanand Jayant Salgaonkar (2023) clarified that nomination does not create a separate mode of succession or override ordinary inheritance laws.

Nominee versus legal heir: Who gets the mutual fund money?

A nominee is the person designated to receive mutual fund investments after the investor’s death, while a legal heir is someone entitled to inherit the deceased’s estate under applicable succession laws. A beneficiary named in a valid will is entitled to the assets in accordance with its provisions, subject to applicable law.

The distinction becomes important when a parent nominates only one child but has multiple legal heirs.

For instance, if a parent nominates one child for mutual fund investments worth ₹50 lakh but a valid will directs that the money be divided equally among three children, the nominee does not automatically become the sole owner. The other children can assert their inheritance rights.

“If a valid will exists, the investments ordinarily devolve in accordance with the will, subject to its validity and applicable law,” Jagtap said.

If there is no valid will, the investments form part of the deceased’s estate and are distributed according to the applicable intestate succession law. The rules depend on the deceased’s religion and personal law, among other relevant circumstances.

Sharma said that even when an AMC transfers the units to the registered nominee, other legal heirs can pursue their inheritance claims before a competent court.

When can a nominee lose the investments?

Being a registered nominee does not guarantee that a child will retain the mutual fund investments as their own. If a valid will leaves the investments to someone else, or succession law entitles other heirs to them, the nominee may have to account for the assets or transfer them to the rightful beneficiaries.

The reverse is also possible. A child who is not named as a nominee may still inherit the investments under a valid will or applicable succession law.

Family disputes can also arise over the validity of a will. Jagtap said heirs may challenge it on legally recognised grounds such as fraud, coercion, undue influence, lack of testamentary capacity or failure to comply with applicable execution requirements. The outcome depends on the evidence and the relevant law.

The distinction is not identical across all financial assets. Sharma noted that certain assets, such as life insurance policies and Public Provident Fund (PPF) accounts, have specific statutory frameworks governing nomination. Mutual fund investors should therefore avoid assuming that the rules applying to one financial product automatically apply to another.

How parents can ensure their children inherit mutual funds

Parents should maintain nominations across their mutual fund folios and ensure the details reflect their intended estate plan. However, nomination alone may not be sufficient if they want their investments distributed in specific proportions among their children.

Both experts recommend preparing a will that clearly identifies the intended beneficiaries and their respective shares. Parents should also review their nominations and wills after major life events, such as marriage, divorce or the birth of a child.

Sharma said investors can nominate up to three people for mutual fund investments and specify the percentage share for each nominee. If no percentages are specified, the investments are divided equally among the nominees under the applicable nomination framework.

Jagtap also recommends maintaining an inventory of mutual fund folios, asset management companies and nomination details, so the executor or family members can identify the investments after the investor’s death.

A properly drafted will, updated nominations and accessible investment records can help reduce disputes and administrative delays.

The key takeaway for parents is that nomination facilitates the transfer of mutual fund investments, but does not ordinarily determine who ultimately owns them. A will that reflects the intended distribution, alongside accurate nominations, can help ensure that the family’s inheritance arrangements are clear.