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.