Fund houses deploy unclaimed money in money market instruments and fixed deposits for which they are allowed to charge an investment management fee of up to 0.50% per annum.
As the name suggests, unclaimed amounts of mutual funds are accumulated from non-encashment of dividends and maturity proceeds by investors.
Today, most investors opt to receive their dividend or redemption proceeds directly in their bank accounts through electronic clearing service (ECS). But instances where the dividend or redemption cheques return to the fund house because investors have not updated their address with the fund house were quite common earlier.
AMCs cannot take possession of the unclaimed corpus. Fund houses are supposed to deploy unclaimed proceeds in money market securities after three months. Sometimes AMCs do not find it feasible to park money in money market. So they invest in bank fixed deposits. If an AMC receives claims from investors, the AMC redeems the proportionate amount of securities and pays it to investors.
If investors claim the money within three years then payment is based on prevailing NAV after adding the income earned on unclaimed money. If investors claim money after three years, the payment is based on the NAV at the end of 3 years.
AMCs are allowed to charge a maximum 0.50 % per annum as investment management and advisory fees though it is up to the AMC to decide if they wish to charge this fee. Some fund houses do not charge any fee for deploying these unclaimed proceeds.
If investors fail to claim their money even after seven years, then the accumulated fund gets transferred to Investors Education and Protection Fund (IEPF) which is utilized for spreading financial education. Once the amount gets transferred to IEPF it can’t be redeemed.
AMCs are expected to remind their investors to claim their proceeds. The annual report of the AMC mentions the details of unclaimed amount along with the number of investors.