Many individuals, especially parents, wish to safeguard their children’s future by amassing the funds needed to meet their goals, such as higher education and wedding expenditures. For this, saving only in a bank account in the minor’s name will not suffice; instead, you have to consider investing in worthy avenues like mutual funds that may generate inflation-beating gains and assist you in building the required corpus in the stipulated time.
Now, you may think, how can a minor invest in mutual funds? Well, a minor can invest in mutual funds with the assistance of their parents/legal guardians. To secure your child’s financial future, you can invest in suitable mutual fund schemes in their name, aligning them with the envisioned financial goals. Given this, if you are planning mutual fund investments for your minor children, you must be aware of the regulations set aside by the Securities Exchange Board of India (SEBI) in this regard.
Documents required to open a mutual fund folio in the child’s or minor’s name:
- Proof of the child’s age. This can be either provided in the form of a birth certificate issued by the municipal authorities or a passport.
- Proof of the child’s relationship with the guardian. In the case of parents, the birth certificate or passport, including the parent’s name, is sufficient. A copy of the court order will be requested in the event of a legal guardian.
In addition, the parent or the guardian to whom the minor is attached will have to be KYC-compliant as per the extant SEBI regulations.
Changes in the rule for mutual fund investments made in the name of minor
The market regulator, in a circular dated May 12, 2023, on Friday announced changes in the mutual fund investment framework in the minor’s name made by parents or legal guardians.
Currently, SEBI allows payment for investment in mutual fund on the behalf of a minor only from the minor’s bank account or from a joint account of the minor with the guardian. As a result, to invest in the name of your dependent minor child, you must first open a bank account in their name.
However, with partial modification to the SEBI Circular dated December 24, 2019 that prescribes the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. Starting a mutual fund in your child’s name no longer necessitates the time-consuming procedure of opening a bank account in their name.
SEBI mentioned in the recent circular that “Payment for by any mode shall be accepted from the bank account of the minor, parent or legal guardian of the minor or from a joint account of the minor with a parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed.”
In simple words, under the new rule, investments can now also be made from the bank account of the parent or legal guardian of the minor or a joint account of the minor with a parent or legal guardian. For instance, when any individual makes a payment for investment in mutual funds in the name of minor or their children by any mode, they can use any of the 3 bank accounts:
- Minor’s account
- Bank account of parents/legal guardian
- Joint bank account of minor and parents/legal guardian
As per the circular issued by SEBI, cheques, demand drafts, etc., would be accepted only from the aforementioned bank accounts.
SEBI has directed all AMCs to implement the required adjustments to permit such mutual fund transactions with effect from June 15, 2023. SEBI’s action is intended to provide uniformity across all mutual fund firms and will streamline the investment process for mutual fund investors who invest on behalf of minors.
Redemption for mutual fund units in the name of minor
On the other hand, irrespective of the source of payment for the subscription of mutual fund units, all redemption proceeds will be credited only to the verified bank account of the minor, which they can hold with the parent/legal guardian.
Furthermore, investments made under a minor’s name will not have joint owners. It is critical to remember that once your child reaches the age of 18, they will become the sole owner of the investment, and you will lose control of the assets.
After the minor reaches the age of 18, the fund houses must seek their Know Your Customer (KYC) information and ensure that it is included in the mutual fund documentation. This means that no further transactions will be permitted unless the minor investor produces the requisite paperwork proving that they are a major according to their birth certificate.
The taxability of gains from such mutual fund investments has 2 aspects.
- If the investment is withdrawn before the child turns 18 years of age, then the capital gains become taxable in the hands of the parent or the designated guardian under clubbing provisions of the Income Tax Act 1961.
- If the investment is redeemed after 18 years of age, then in this case, capital gains can be taxed in the hands of children, provided the original investment is considered as a gift from the parents. At 18, when a child has no source of income, the tax obligation is typically minimal or non-existent. This would be significantly less than what parents, probably in a higher income tax bracket, would pay.
Therefore, having a mutual fund investment in a child’s or minor’s name provides a stronger sense of commitment for parents to continue the investing in a disciplined manner to build the required surplus for their future. In conclusion, you must make an informed investment choice regarding your child’s future and bear in mind that before making any investment decisions, it is crucial to conduct stringent research or consult a SEBI-registered investment advisor.
This article first appeared on PersonalFN here