Investments in equity mutual funds (MFs) are suitable to accumulate funds to meet long-term financial goals as, despite getting affected by market volatility in the short run, equities produce higher return in the long run than other investment options. So, equity MFs are most suitable to meet one’s life goals for kids, which are predictably long-term financial goals.
But to invest in mutual funds, intended investors need to follow a stringent KYC (know your customer) process. So, the question arises, how a minor can invest in MF as they don’t have any income and the required documents to complete the KYC process?
Due to such confusion, many people either invest in MF through their own folio or contribute to lower-return options like child insurance plans, Sukanya Samridhhi Yojana (SSY) etc for realisation of long-term life goals of children like higher education, marriage etc. As a result, they would either end up using the fund for some other goal or will fail to create a sufficient corpus to meet the goal.
Although, many Asset Management Companies (AMCs) allow KYC-complied investors to invest for their minor children, but there was no set guideline on this earlier. To clear the confusion and streamline the investment process in MFs in the name of minors, market regulator Securities and Exchange Board of India (SEBI) has issued a detailed guideline.
According to SEBI, investment in MF folio of a minor may be made either from bank account of the minor or from a joint account of the minor with the guardian only, through Cheque, Demand Draft or any other acceptable mode. For existing investors, fresh payout bank mandate has to be given to ensure that the redemption amount gets credited in the bank account of the minor investor held either singly or jointly.
In the absence of proper guidelines, AMCs used to allow guardians continue to transact on behalf of the minor investors, even after they become major. However, the market regulator has clarified that the guardians will no longer be allowed to do so, and no transactions will be allowed till the minor changes his/her status to major on attaining majority age by providing all the KYC details, updated bank account details including cancelled original cheque leaf of the new account.
To ensure the compliance process, SEBI has asked the AMCs to build a system control at the account set up stage of Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) on the basis of which, the standing instruction is suspended when the minor attains majority, till the status is changed to major.
So, the new guidelines would ensure that the minor beneficiary would actually enjoy the benefits of long-term investments you started in his/her name to fulfill the long-term goal for which the MF investment was started.
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Source: Financial Express