The markets regulator Securities Exchange Board of India (SEBI) introduced a set of rules relating to buying mutual fund units in the name of minor children through guardians. The change in rules was announced through a SEBI circular released on May 12. The new will come into effect from June 15, 2023.
The new rules are meant to bring uniformity among all mutual fund houses with regards to investment in minor’s accounts.
The SEBI's circular reads: “Payment for investment 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 parent or legal guardian.”
Minor’s account for redemptions
Another point worth noting is that when mutual fund redemption requests are made, the proceeds of redemption will be credited only in the verified bank account of the minor which may be the account that the minor holds with their parent (or legal guardian) after completing all KYC (Know Your Customer) formalities.
It reads: “For existing folios, the AMCS shall insist upon a change of pay-out bank mandate before redemption is processed.”
What do the new rules mean?
On the face of it, the new rule implies that when a parent or guardian buys mutual fund units in the name of children, they can make the payment from any bank account and when those units are redeemed at a later stage, the amount will be transferred only to the bank account of the minor, that can be a joint account also.
So, when the units are purchased, any of the three bank accounts can be used 1. minor's bank account, 2. Bank account of parent, 3. Joint bank account of minor and parents.
However, when the units are redeemed, the sum will be transferred only to one account i.e., the minor’s account (which could be a joint account operated along with the parents).
The SEBI's circular also highlights that all asset management companies are advised to make the necessary changes to facilitate these changes in mutual fund transactions with effect from June 15, 2023.