The SEBI circular mandates that, as of April 1st 2023, physical shareholder folios that are missing any of the data—such as a PAN, email address, mobile number, bank account details, or nomination—must be frozen.

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Key Difference Between Mutual Funds and Nidhi Company
Difference Between Mutual Funds and Nidhi Company

Introduction

The purpose of this essay is to clarify the distinction between Nidhi Company and Mutual Funds. The sole resemblance between the two is that they can both only function when a third party invests its resources in them. Otherwise, there are major variances between the two. It is essential to examine the fundamental traits of Mutual Funds and Nidhi Company before going into their key distinctions.

What are Mutual Funds?

Here, you can see what Mutual Funds and Nidhi Company signify.

Meaning of Mutual Funds

A mutual fund is a professionally managed investment vehicle that enables individuals with similar financial goals to combine their resources. The funds are then used to buy a variety of securities, including bonds, equities, government securities, and other short-term loans. After subtracting any necessary taxes and other costs, the income from this shared investment pool is then equally dispersed to the participants based on the Net Asset Value (NAV). The market value of all the bonds, equities, and other assets held by a mutual fund on a given day is represented by the NAV. It represents the cost at which investors purchase or redeem their mutual fund holdings.

For a fee levied by the fund house, which is withdrawn from the pool of money, professional fund managers invest the money raised in the mutual fund in accordance with the pre-stated goal of the fund. This charge is established in accordance with the Securities & Exchange Board of India’s regulations (SEBI). Investors who lack extensive market understanding or a sizable investing budget might consider mutual funds.

A Systematic Investment Plan (SIP), which enables the regular set investment of a particular amount over repeating periods, is another option for investors who want to invest in mutual funds. There are several sorts of mutual funds depending on the mutual fund structure, such as open-ended and closed-ended mutual funds, or based on asset classes, such as equity, debt, and hybrid mutual funds.

It is necessary to have a PAN card in order to invest in mutual funds. In addition, one should offer:

  • Valid identification documents include, among others, PAN, Aadhar, passports, voter identification cards, driver’s license, registered lease or sale deeds of homes, and ration cards. 
  • Valid address documents include, among others, Aadhar, passports, voter identification cards, and drivers licenses.

What is Nidhi Company?

The Nidhi Company is an organization that has been registered under Section 406 of the Companies Act of 2013 and is governed by the Nidhi Rules of 2014, which are administered by the Ministry of Corporate Affairs. It is a Non-Banking Finance Company (NBFC) that has been granted a number of exemptions by the RBI and does not require the RBI’s permission before being registered. The purpose of Nidhi Companies is to lend and borrow money to their members. According to the Nidhi Rules, Nidhi Companies are established with the goal of “cultivating thrift and saving habits among its members and receiving from and lending to the members of their mutual benefit” as well as “duly complying with rules formed by the Central Government.” They may also be known as Mutual Benefit Corporations.

A public business with at least seven shareholders and three directors is required to be a Nidhi Company. Within a year of incorporation, the company must have at least 200 shareholders, net owned funds of at least Rs. 10 lakh (equity share capital less free reserves less accumulated losses on intangible assets), unencumbered term deposits making up at least 10% of total deposits, and a net owned funds to deposit ratio of 1:20.

Dealing in chit funds, hire-purchase finances, leasing of finances, the securities industry, the insurance industry, receiving from or lending funds to any person or entity other than its own members, or issuing shares or any debt instruments are all illegal for Nidhi Companies.

The following papers must be submitted in order to incorporate a Nidhi Company:

  1. Directors and shareholders must provide verification of their identities and addresses, a copy of their PAN, and passport-size photos.
  2. The owner or landlord must sign a no-objection certificate, the lease or sale contract, and utility bills if there is a registered office.
  3. The company’s Memorandum of Association (MoA) and Articles of Association (AoA),
  4.  Each director’s Digital Signature Certificate (DSC), and their Director Identification Number (DIN).

Difference Between Mutual Funds and Nidhi Company

There are several distinctions between Nidhi Company and mutual funds, some of which are described below:

  • Nature of Business

      • A mutual fund’s primary function is to take money from investors, invest it in securities, and pay investors returns in line with NAV.
      • A Nidhi Company’s operation is limited to lending money to and taking money from its members.
  • Objective

      • A Nidhi Company’s primary goal is to instil a culture of thrift and saving among its members, whereas a Mutual Fund’s primary goal is to grow the investors’ money.
  • Who may invest money and redeem it?

      • In contrast to Nidhi Firm, where only members are permitted to deposit money and borrow money from the company, mutual funds are appropriate for any individual with a common investing purpose.
  • Usage of Funds

      • The fund managers can deal with chit funds, hire-purchase financing, renting of financing, securities business, and insurance companies using the pool of money in a mutual fund.
      • A Nidhi Company is only permitted to utilize the deposits made by its members for lending to other members.
  • Legal Status

    • A mutual fund is a mechanism for investing that makes investments easier and gives investors profits. It is regulated in line with the rules and regulations issued from time to time by SEBI and is a “trust” as defined under the Indian Trusts Act of 1882.
    • A Nidhi Company is a publicly traded company that was established in accordance with Section 406 of the 2013 Companies Act and is controlled by the 2014 Nidhi Rules.

Mutual funds and Nidhi Companies are two different types of businesses since they have different goals and business models.

The mutual fund company and the Nidhi Company are frequently mistaken for being the same type of business. There is, however, a huge distinction between the two. The goals, type of business, relationships, etc. of these two firms are different.

Nidhi company registration onlineSection 406 of the Companies Act of 2013 recognises Nidhi Companies as companies involved in non-banking Indian finance. The Nidhi Company’s major goal is to teach its members simply the value of being frugal and conserving money. Lending and borrowing exclusively among the company’s members is its primary business activity. The mutuality concept serves as the foundational tenet of Nidhi Company. The Permanent Fund, Benefit Fund, Mutual Benefit Fund, or Mutual Benefit Company are other names for Nidhi Company. The Nidhi Companies are furthermore subject to regulation by the ministry of corporate affairs.

A pool of money gathered from several investors and used to purchase a variety of assets is what is known as a mutual fund. Professional money managers who invest in assets and seek to generate income and capital gains manage and run mutual funds. The portfolio of a mutual fund is set up and kept up to date in accordance with the specified investment goals in the prospectus. The objective of the mutual fund is to give small or individual investors access to portfolios of stocks, bonds, and other assets that are professionally managed. Through the mutual fund, money is invested in a huge variety of assets, allowing the investor to diversify their holdings at incredibly cheap costs.

What is the Difference between Mutual Funds and Nidhi Company

  1. The Nidhi Company is permitted to interact solely with its members, but mutual funds are not subject to the same limitation. This is one of the key differences between the Nidhi Company registration and mutual funds.
  2. The Nidhi Company’s major goal is to instill a culture of frugality and saving among its participants. On the other hand, the mutual fund’s primary goal is to boost depositors’ wealth.
  3. Only among its members is lending and borrowing of money Nidhi Company’s primary line of business. However, the nature of the mutual fund business is to take deposits from investors and then invest the money raised.
  4. The Nidhi registration Company may only lend money to its members using the deposits it has received. Contrarily, the mutual fund may utilize the amount of deposits received for investments or to conduct its operations, including hiring out, leasing, financing, and the purchase of securities, among other things.

Conclusion

Nidhi Company registration and Mutual Funds operate on multiple levels with distinct corporate goals, structures, and methods of operation. Mutual Funds collect investor funds, invest them further in securities, and then pay investors returns in line with NAV. Non-Banking Finance Companies (NBFCs) called Nidhi registration Companies were established with the purpose of lending and borrowing money to its members. They only share the ability to function when a third party invests its resources in them, and both provide financial rewards to parties that contribute money to their pool of funds.

 

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