Mutual funds investment in children's name: SEBI's new rule to come into effect on June 15

New Delhi: The Securities Exchange Board of India (SEBI), India's market regulator, has issued new guidelines for purchasing mutual fund units on behalf of underage children through guardians. The rule modification was notified in a SEBI circular issued on May 12. The new regulations will go into effect on June 15, 2023.

The new rules are intended to establish consistency in all mutual funds institutions in terms of investment in minor accounts. The SEBI’s circular reads, “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 a parent or legal guardian.”

Minor’s account to be used for redemptions

Another thing to keep in mind is that when a minor requests a mutual fund redemption, the proceeds will be credited only to the minor's verified bank account, which may be the account that the minor holds with their parent (or legal guardian) after completing all the Know Your Customer (KYC) formalities.

The SEBI guidelines read, “For existing folios, the AMCs shall insist upon a change of pay-out bank mandate before redemption is processed.”

Implications of the new rules

On the surface, the new rule implies that when a parent or guardian purchases mutual fund units in the name of their children, the payment can be made from any bank account, and when those units are redeemed later, the amount will be transferred only to the minor's bank account, which can also be a joint account.

As a result, while purchasing the units, any of the three bank accounts can be used.

• The minor’s bank account 

• The parents’ bank accounts 

• The minor’s and parents’ joint bank account.

When the units are redeemed, the money will be moved to only one account, the minor’s account (which might be a joint account with the parents).

According to the SEBI circular, all AMCs are encouraged to make the necessary changes to allow these changes in mutual fund transactions beginning June 15, 2023.