UPI for mutual funds: Benefits, limits and impact of new MDR explained

UPI is a convenient way for many investors to set up their SIPs or to make a lumpsum payment when they wish to invest in mutual funds, as payment is instantaneous and convenient to complete. UPI allows mutual fund investors to make instant payments for lump-sum investments and set up recurring SIP mandates. Here’s a look at its benefits, limitations and the impact of the new MDR.

WHAT IS UPI? HOW IS IT USED IN MUTUAL FUNDS?

Unified Payments Interface (UPI) is a real-time payment system that allows users to make instant payments directly from their bank accounts. In mutual funds, investors can use UPI to make lump-sum investments and set up recurring mandates for systematic investment plans (SIPs).

Investors can make payments using a UPI ID or by scanning a QR code. Under Sebi’s validated UPI framework, mutual funds and other registered intermediaries use standardised UPI IDs carrying the ‘@valid’ handle, which helps investors verify that they are making payments to a registered intermediary.


UPI payments for investments are subject to a daily limit of up to Rs 5 lakh, depending on the bank or payment application.

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WHY DO SEVERAL INVESTORS PREFER USING UPI IN MUTUAL FUNDS THESE DAYS?

UPI allows investors to make payments 24 hours a day, seven days a week, including weekends and holidays. Payments are transferred quickly, making it easier for investors to meet the applicable cut-off time for receiving the day’s NAV. UPI also eliminates the need to enter bank account details for every transaction or log into net-banking systems. In comparison, when an investor pays by cheque, units can be allotted only after the funds are realised.

WHY IS THE UPI UNDER THE SPOTLIGHT THESE DAYS? DOES IT MATTER TO MUTUAL FUND INVESTORS?

UPI is under the spotlight following the introduction of a 0.02% merchant discount rate (MDR) on select transactions. MDR is a fee charged for processing a digital payment, which is generally borne by the merchant or entity receiving the payment. For mutual fund investors, SIPs set up through UPI AutoPay are exempt from the charge, while one-time mutual fund investments made through UPI will attract the MDR.

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SO, WILL THIS IMPACT INVESTORS IN MUTUAL FUNDS?

The impact on mutual fund investors is expected to be limited. Fund houses are likely to absorb the one-time cost rather than pass it on to investors, given the relatively small charge involved.

ARE THERE DISADVANTAGES TO USING UPI?

UPI has transaction limits that can restrict its use for large mutual fund investments. UPI payments for investments are subject to a daily limit of up to Rs 5 lakh, depending on the bank or payment application. For instance, if an investor wants to make a Rs 10 lakh investment, UPI may not be suitable for making the entire payment at one go. The investor may instead have to use alternative payment modes such as net banking, NEFT or RTGS.