How to Manage Mutual Fund Investments of a Minor Turning 18 Years of Age

May 25, 2023 Mutual Fund

Parents often wish to save money in their child’s name to help build a corpus which can come in handy in achieving long-term goals like education or marriage. One of the most significant priorities for parents is their children’s financial security.

For this purpose, parents can either set aside funds for their children in their savings bank accounts or invest in numerous channels in the minor’s name. A parent can initiate this action as soon as a child is born so that there is adequate time for the investment to grow over a decade and more. They frequently attempt to invest little sums received as gifts from friends and family on birthdays and festivities or deposit money to the child’s bank account on a monthly basis.

Can I start SIP for my child (minor)? This is a common question asked by parents. Yes, minors can invest in mutual funds with the assistance of a guardian. Mutual funds over the long term will help generate sufficient returns to help your child achieve their future financial needs.

What is the procedure to start investing in mutual funds in minor’s name?

Since a minor is not regarded to be able to make informed decisions on his behalf, all minor investments must have a designated ‘Guardian’ in charge of managing the minor’s assets. In most circumstances, the parents are the natural guardians of a minor, but in other cases, a court-appointed guardian is necessary.

Currently, SEBI allows payment for investment in mutual funds on 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 start investing in the name of your dependent minor child, parents must first open a bank account in their name.

However, thanks to the partial modification in the recently issued SEBI circular dated May 12, 2023, which reveals a new rule stating 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.”

[Read: SEBI Tweaks the Rules for Mutual Fund Investments in the Name of Minor]

Now, starting a mutual fund in your child’s name no longer necessitates the hassle of opening a bank account in their name. To invest in mutual funds in the name of the minor by any mode, you can simply use minor’s account, a bank account of the parents/legal guardian or a joint bank account of minor and parents/legal guardian. However, do note that 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.

Apart from this, there are a few points to consider while opening a mutual fund folio in minor’s name:

• Proof of age of the minor child (Birth certificate or passport)
• A document which proves the relationship between the minor child and the guardian
• KYC details of the minor child as well as the guardian
• Ownership of the investment, however, shall solely lie with the minor child, and it should not be a joint account.

Given that, when an individual invests in a minor’s name, the guardian’s name is added to the mutual fund portfolio. The guardian has the authority to purchase, redeem, or execute systematic transactions on behalf of the minor. However, when the child reaches the age of 18, control of the folio passes from the guardian to the minor child. After the minor child’s 18th birthday, the parent/legal guardian cannot transact in these folios. All standing orders, including the Systematic Transfer Plan (STP), Systematic Investment Plan (SIP), and Systematic Withdrawal Plan (SWP), also stand suspended.

As a result, when the minor turns 18 years old, they can operate the mutual fund account only after completion of certain paperwork and then convert the folio to major status from minor by following the due process.

What is the procedure to be followed after the minor turns major or attains 18 years of age?

1. Update the KYC

PAN Card – This works as identity proof. When the investments are made in the child’s name, Permanent Account Number (PAN) is not mandatory. But as the child reaches the age of 18, there is a need to provide a copy of your PAN. If the child already has a minor PAN, the PAN status needs to be changed to major, as a minor PAN does not have the photograph and signature of the child. The updations can be done by using the ‘change of PAN details’ form using – https://www.onlineservices.nsdl.com/paam/endUserRegisterContact.html

2. Bank Account

The bank account with minor status needs to be updated with the major status. Both the child and the guardian need to visit the bank personally. If the investments held in the minor folio were madefrom some other bank account before the above-mentioned rule insisting on a minor bank account came into effect in December 2019, then a new bank account needs to be opened, with the child (now a major) as the first holder. Once this is done, the bank can issue a chequebook with the applicant’s name imprinted on the cheque.

Once you are done with these steps, you have to complete the KYC process. KYC can be done online or in paper form (offline). This can be done with any one of the fund houses in whose schemes you are invested or through the registrar and transfer agents (RTAs). The bank account and the mutual fund folio must be KYC-compliant.

Change the status from minor to major

Now that you are KYC compliant as a major (an individual above 18 years of age), you can approach each fund house in which you have a minor folio. Every mutual fund house provides a ‘status change from minor to major form’ on its web portal as well as at branch offices. You should fill up the form and submit it along with the following documents:

• Copy of PAN
• Copy of KYC acknowledgement
• A cancelled cheque leaf with the applicant’s name printed on it
• Nomination form
• Signature attestation by the banker in the prescribed format

Do note for each folio, you have to submit separate forms. If you have many folios in the same fund house, you may send a single letter that clearly specifies all of the folios and includes the signatures of the major child and all guardians. Some fund houses also enable scanned copies of papers to be submitted online. It is possible that the complete process of arranging the documentation to alter the folio status from minor to major may take a few working days.

After the status of your mutual fund folio is changed to major, the control of the folio goes to the hands of the minor child that turned major. They become the first holder of the folio and can thereafter transact in the units of the mutual fund and can also add anyone (including her parents) as joint holders in that folio.

This article first appeared on PersonalFN here