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Tuesday, July 5, 2016

National Automated Clearing House (NACH)

 Do you know how much time it takes to start a systematic investment plan (SIP) in a mutual fund (MF) scheme? Typically, it takes about 30 days. But not anymore; thanks to a system change in the banking industry. MF investments have moved to the National Automated Clearing House (NACH) system, from National Automated Clearing House (NACH)Here is what it means.

Faster process through computerisation
One of the reasons why it took time to register your SIPs was that ECS was a slower system. Your SIP instruction plus the ECS mandate had to be moved physically. Once you submitted the ECS form, along with your MF application and SIP forms, to your fund house, it would send it to your bank by courier. The bank would then verify your signature and register the debit instruction in its system.


This used to take days, depending on the distance the mandate had to travel. Worse, although the bank would verify, it would not confirm or deny your mandate to the fund house. As a result, fund houses had to assume that the mandate is registered unless a specific rejection was received. It was possible that once the fund house made your SIP instalment, it would get rejected because the bank would have rejected the mandate earlier. This entire process was manual and physical movement of forms was necessary.


The new system is more advanced. Now, all you need to do is fill up an NACH form, which your MF will submit to National Payments Corp. of India (NPCI), which was formed by the central bank to handle retail payments. Once NPCI gets your mandate from the fund house, it sends it electronically to your bank. The bank verifies it, confirms it to NPCI and the SIP can start. Since the process is computerised, and works on scanned images on the Cheque Truncation System, the SIP starts sooner. In this way, the mandate format is also similar to a cheque. Through the new system, it takes about 15 days to get your SIP going.


One-time mandate
Earlier, say, you invested in an MF scheme and after three months decided to invest in another scheme or start an SIP. Even if this was your second SIP, a fresh mandate was needed; the (lump sum) application or SIP form and a cheque had to be given. This is because in the earlier (ECS) system, the mandate did not get registered for subsequent investments.


Under NACH, you need to give the mandate only once. Each fund house will require a mandate, but these will hold for all schemes within a single fund house. This is called the one-time mandate (OTM). For a fresh investment, you need to fill up the OTM and specify a maximum amount that you think you might invest cumulatively in that fund house. Once NPCI registers the OTM, whenever you decide to invest in that MF, all you need to do to make additional investments is submit a form or send a text message. You do not need to give a fresh cheque or transfer the money using Net banking.

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