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 direction. You cannot just choose a mutual fund investment and start investing in it using your bank account. To invest in the name of your dependent minor child, you must first open a bank account in his or her name. This is because SEBI mandates mutual fund houses to accept payments, towards mutual fund investments, only from the minor’s bank account or a joint account that the minor may be holding with his or her guardian. As per the circular issued by SEBI, “Cheques, demand drafts, etc., would be accepted only from the aforementioned bank accounts."
Prathiba Girish, Founder, Finwise Personal Finance Solutions, says, “This helps because one can genuinely invest for the minor, instead of trying to plan taxes. It’s a step in the right direction since investors will think twice before redeeming investments of the kids. This is not the intended benefit, but it helps nevertheless.”
KYC details as the minor turns 18
Once the minor has reached 18 years of age, the fund houses must seek their Know Your Customer (KYC) details and ensure the inclusion of the same in the mutual fund documents. This implies that no further transactions would be allowed unless the minor investor submits the necessary documents needed to prove that he or she is a major as per his or her birth certificate.
Investing in mutual funds for minors ensures that they have an accumulated corpus by the time they turn 18 years old. This also explains why SEBI has ordered the asset management companies (AMCs) to come up with a system that stops the investment inflows through Systematic Investment Plans (SIPs) or gradual withdrawals via Systematic Transfer Plans (STPs) and Systematic Withdrawal Plans (SWPs). This involves a standing instruction that all investments and withdrawals must be suspended when the minor attains majority status till the minor has submitted all documents seeking a change in his or her status from “minor” to “major”.
The request for the transfer of any investment portfolio takes time. This is why the AMCs have been issued a standing instruction to execute image-based processing wherever the claimant is either a nominee or a joint holder in the investor folio. The regulator has also mandated that AMCs start a dedicated central helpdesk to impart relevant information to minor investors.
Redemption halted till the transfer
The minor on attaining majority status must first seek a complete transmission of units before hitting the “Redeem” button.