The Central Know Your Customer (cKYC) database would put all your demographic information in one place so you can use it with any financial institution
I have been investing in mutual funds sporadically for the past 2 years. Recently, I heard about the cKYC. What is this, and will it impact my investing?
—Vikram Thakkar
The Central Know Your Customer (cKYC) is a new initiative put in place by the Ministry of Finance to centralize the demographic records of people who interact with diverse financial institutions. Until now, different types of financial institutions maintained a different database of customer information. Insurance companies authenticated and established the identity of their customers separately from those financial services companies regulated by the Securities and Exchange Board of India (Sebi), such as brokers and mutual funds. Each bank, of course, had a database of its own. Now, to avoid this duplication of effort—both by companies and by customers—cKYC has been formed wherein a customer can lodge and manage her information in one place and use it with any financial institution in the country.
At least, that is the vision of cKYC. However, in reality, not every financial service company is participating in this structure, and regulators have placed different timelines on their regulated entities to initiate and complete their participation. Sebi has been at the forefront of adopting cKYC and has asked all entities regulated by it to start updating the cKYC database along with updating the databases maintained by different KYC registration agencies (KRAs). So, at this time, persons desirous of starting off with investing in mutual funds would need to have their record entered both in the existing database as well as the new database. Over time, it is hoped that the new database will take over and be the single central point of data.
For people such as yourself, who are already investing in mutual funds, as of now, there is nothing more to be done. The onus is on the service providers (brokerages, for example) to update the cKYC database. Your broker or mutual fund company could come to you asking for additional information to fill in (such as mother’s name), which are required by the new database. At some point in time, once the dust settles, you will have something that could be called a KYC number, which you can use with any financial services company and avoid further production of documents such as identity and address proofs.
In April, I will get some lump sum payment from my employer. I want to invest it in mutual funds. What would be a better option: to invest all of it in one good fund or to invest it in several funds? I expect to have an investible amount of Rs2 lakh. I have no near-term goals and can hold on for 4-5 years.
—Vaibhavi Gupta
When it comes to investing a lump sum, there are two competing priorities and an investor must seek to balance between the two. The first one is that one should try and avoid market-timing risk. Investing the money all at once will mean you are taking a bet on the current state of the market and that could work out badly. This suggests that one should invest in a measured pace by spreading out the investments across time.
The other priority is to let your money be in the market for the longest possible time to make the most of the potential of your investment. The longer your money stays invested, the higher the likelihood of a good return. That means you need to get your money into the market-linked investment instruments as quickly as possible.
The key is to balance between these two priorities. The way to do this is to spread out your investment over a time period that is relatively short compared to your investment time period.
In your case, given that you are investing for about 5 years, I would say that you could complete your investment in about 12 instalments (a year, if done monthly) by using a systematic transfer plan. For this time period, you could select a large-cap fund, a couple of balanced funds, and a bond fund to split Rs16,000 evenly between them and deploy within a year.
I am a 65-year-old very conservative investor and want to invest in exchange-traded funds (ETFs) that track the Sensex. But I am old enough to remember the days when ACC used to be part of the Sensex. Many other companies have fallen out of benchmark indices. When that happens, will the ETF also change its composition? Is that a reason for concern or comfort?
—M. Sacaria
When the composition of the underlying index changes, an ETF would change its portfolio as well to reflect this. The fund would sell the shares of an exiting stock and buy into the new stock being brought into the index. When this happens, a small tracking error is introduced in the ETF—this means that the fund might differ from the change in the underlying index value slightly. That apart, as an investor, your investment will continue to track the index as was your intention when you invested in the ETF. So, it is neither an advantage nor a disadvantage. The change in the ETF’s portfolio is by design. Your investment will always reflect the current state of the index. — Money Market Guru
