Parents usually want to inculcate the habit of saving in their children. To this end, many parents let their children have a piggy bank, in which children put in the money given to them as a gift or earned as a reward for doing small chores around the house. The piggy bank is just a place to deposit money, there is no interest earned, there are no other gains involved. When the child feels like it, he/she breaks it open and buys small things they fancy.
But, what if you could not only help the child earn more returns with their saved up capital, but also, in the process, help them develop a better understanding of financial instruments? A good way to do this is to invest in mutual funds in your child’s name. Yes, in India, you can start a mutual fund account in your minor child’s name and build them a small nest-egg.
A mutual fund account can be started in the minor’s name by a parent or a legal guardian. Such a fund could be a children’s gift fund, or a fund for specific purposes with specific maturity dates like an education fund. While the account will be in the child’s name, it will be held in trust by the parent or legal guardian till the child attains the age of 18. The ownership of the fund lies with the minor.
How to open a mutual fund account for a child
To open a mutual fund account for a minor, there is some paperwork involved. Two types of documents have to be submitted to open such an account.
The first is proof of age of the child. For this, the birth certificate, school leaving certificate or any such document which is proof of the age of the minor, can be submitted.
The second document is required as proof of relationship with the guardian. In the case of the parents, a birth certificate or a passport can provide this kind of proof. In the case of a legal guardian, any legal order or statement certifying the relationship of the child with the guardian has to be provided.
Do note you will need to open a bank account in the minor’s name or have a joint account with the child to make such investments.
A change of guardian can be effected in the case of death or a legally mandated change. This can be done by providing proof of the same and obtaining a no objection certificate from the previous guardian, as the case may be. The new guardian will have to produce documentation for the standard KYC (know your customer) process.
This SEBI circular gives more details on how such funds are to be operated by the parents/legal guardians.
Once the account is opened, standing instructions regarding a systematic investment plan (SIP) etc. can be given to the fund house. These instructions will remain operational until the child attains majority or the fund matures, whichever is earlier.
What happens when the child turns 18?
The moment the child attains majority, that is, becomes 18 years of age, the rights of the parent/guardian to operate the account ceases. The mature adult child can now operate the account on their own but they have to submit some documents before doing so.
In fact, this is critical as all customer-initiated transactions in the fund will also stop till the status of the minor is officially switched to major.
Young adults have to submit what is known as a minor to major (MAM) form, to be able to operate the fund on their own. But, before doing so, they have to change their status from minor to major in their bank account as well.
The AMFI website lists the following documents that has to be submitted by the child to get control of his/her account:
- A duly filled MAM form, signed and attested.
- Copy of PAN card
- KYC form
- A cancelled cheque with the applicant’s name
- Attestation of the signature of the applicant by the bank
- Nomination form
- Any fresh standing instructions like SIP etc
Once this is done and approved, the young adult can take charge of the mutual fund account and redeem or re-invest their returns, or continue with the investments, as they deem fit. Thus, a parent or guardian can start investing early for their child using mutual funds and give them a head-start in life.