Investing In Mutual Fund For Minors?

What do you need to know before investing for your minor in mutual funds?

No dreams for you as a parent are bigger than seeing your kids grow and succeed in their chosen fields.

One common aspiration for every parent is to facilitate high-quality education needs for their child, for which it is always wise to start investing in their future dreams now. Mutual fund as an instrument is one of the proven ways to fund this goal and it is advisable that parents start planning for the same as soon as a child is born.

I know I Know! You must be wondering, how you can invest in your child’s names as they are still a minor.? Don’t worry, mutual fund provides you an option to invest in your child’s name considering them as minors, you will be considered a guardian till your kid has grown up and become an adult (by the age of 18 )

But before we jump on to help you know how, you should be aware of the rules set by SEBI, which must be followed in this regard.

What You Should Know Before Investing for your minor?

Here are a few clear guidelines laid down by SEBI

Bank Account To Facilitate Transaction Has To Have the Minor’s Name:

Any payments made against the mutual fund purchases have to be from the minor’s bank account or from the joint account in the name of the minor along with the guardian.

When minor turns major(18+) :

What happens when a minor has attained the age of 18? As per SEBI directive, once the minor has turned major, s/he will be required to go through the KYC process to establish that s/he has turned major, and until that is done any kind of mutual fund transaction will be barred

Ongoing SIP will be Stopped:

All the AMCs are clearly required to have a provision to Stop the ongoing SIP/STP/SWP as soon as the minor turns 18, till s/he has a legal status of being a major as per India’s governing law.

Transmission of Units:

In case something happens to the deceased, SEBI has mandated AMC to have image-based processing to expedite the process of the mutual fund units transmission to the claimant, who needs to be a nominee or a joint holder in the investor folio.

The claimant will be required to apply through the Transmission request form. Any unclaimed fund will be transmitted along with the dividend accrued to the nominee, the average turnaround time once the application has been submitted to get this done will be around 10 days.

SEBI has requested AMCs to have a dedicated central help desk carrying relevant information, to help the claimant with their transmission request.

Redemption of Accrued mutual fund units:

As per SEBI guidelines, any redemption request by the claimant will not be honored until the transmission of units is done against the claimant's name.

What All Documents Are Required to Start Investing For Minors?

If you are looking to start investing for your minor you have to furnish the following documents

Minors D.O.B & Age-proof Doc:

• Birth Certificate Proof for the minor
• Passport

Document proof to validate the minor’s relation with the Guardian

Note!

• The Guardian of the minor has to be KYC complaint as per SEBI guidelines
• The legal guardian will be required to submit a copy of the court order stating their relationship with the minor
• If the guardian has to be changed in between, NOC has to be obtained from the current guardian, along with a court order that specifies clearly the order to appoint the new guardian has to be furnished. This new guardian also needs to be KYC-compliant.

Tax obligations :

Minors holding mutual fund folios under their name will be eligible to receive dividends basis the funds invested. So all the profit which s/he will make through dividend and mutual fund unit redemption will incur short-term and long-term capital gain tax as per Indian Income Tax Act.

• Until the minor turns major, income generated will be clubbed to guardian income and no tax liability will be directly applicable to the guardian.
• If the minor’s mutual fund unit is sold before 1 year, the short-term capital gain tax will be applicable to the guardian's income
• If the minor’s mutual fund unit is sold after 1 year, the long-term capital gain tax will be applicable to the guardian’s income, taking into account the exempted limit.

Summary:

If you want to gift a better financial future to your child in the present, start investing early on their behalf, you will get enough time and also financial levy to plan it smartly. Opening a separate minor account to fund the same can also be wise if you are truly comfortable & willing to let your child manage it once s/he grows, but if you think otherwise you can still invest in your name ensuring you are sustaining it without fail.

Whichever way it suits, the very idea of being invested in your kid's future is rewarding, and if you have the intent to make it actionable keeping your child’s dream in focus it will turn out to be the most satisfying decision for sure.