Some parents feel that when the child turns 18, the child will be able to operate the account independently and they will lose control over the investments. They fear that children at that age can misuse the money. ET explains how a mutual fund can be a good option.
Can mutual fund investments be made in a child’s name?
An investment can be made in any mutual fund scheme in the name of a child who is less than 18 years old, and there is no restriction on the investment amount.The child shall be the first and sole holder in such a folio. No joint holder will be allowed in this folio. The guardian in the folio can be either parent (that is, father or mother) or a court-appointed guardian.
What transactions can be done in a child’s mutual fund account?
All transactions, be it lumpsum investments, systematic investment plan (SIP), systematic transfer plan (STP), and switch or redemptions, can be done in a child’s account, operated by the guardian. However, this will continue only till the date of the minor attaining the age of 18. After which the SIP or STP will stop, even though the instructions may be for a period beyond that date.
What documents would you need for this?
For this type of investment, you need a valid document proof of the child’s age and your relationship with the child. Typically, a birth certificate, copy of the passport, etc., evidencing date of birth of the minor and the relationship of the guardian (natural or legal guardian) with the minor will work. These need to be provided while making the first investment or while opening a folio. Subsequent investments in the same folio of the same fund house will not require these documents. It is mandatory for the guardian to comply with KYC regulations. As per recent guidelines, 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.
What do you need to do when the child turns 18?
On the date the child turns 18, all SIP/STP in the folio will be frozen for operation by the guardian. After this age, the unit holder will have to operate the account independently. Prior to the minor turning 18, the AMC/mutual fund will send a notice to the unit holder at the registered correspondence address, advising the minor to submit, on attaining majority, an application form along with prescribed documents to change the status of the folio from ‘minor’ to ‘major’. They also need to submit a KYC acknowledgement letter.
What are the pros and cons of investing in a child’s name?
The biggest advantage of investing in a child’s name is that it helps maintain discipline and earmark a corpus separately. Among the disadvantages is that investors may not be able to keep track of any switch redemption as the tax liability is on the parent. Some parents feel that when the child turns 18, the child will be able to operate the account independently and they will lose control over the investments. They fear that children at that age can misuse the money.
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