What if you could give your child a gift that would hold value today as well as in the future? A mutual fund investment could potentially be one such. The procedure for gifting mutual funds is a little unique. Mutual funds do not accept payments from third parties.

This essentially means that one cannot invest in a scheme using a cheque that has been issued by another person. However, when it comes to gifting a mutual fund investment to a minor child by following prescribed rules, the same is permissible.

Third-party payments are accepted by mutual funds in case of payment on behalf of a minor. This is subject to a limit of ₹50,000. Therefore, parents, grandparents and other immediate family members can invest in a mutual fund in the name of minor children.

Steps to get you started

Start a mutual fund investment in the name of the child. The parent/guardian will have to open a mutual fund folio in the name of the minor child.

It is important to note that the investment will be held solely in the name of the minor. Since the minor is not legally allowed to take financial decisions, there will have to be a designated parent or guardian who will be the account’s custodian.

The KYC formalities have to be completed by the parent or the guardian. In the case of a third party (grandparent or other immediate family) making an investment on behalf of the minor, a declaration form needs to be submitted, which will have details about the bank account of the person making the investment and their /her relationship with the minor. The third-party has to be KYC-compliant. The form must be signed by the third party and the parent/guardian of the minor child.

Required documents

The birth certificate or the passport of the child can be used for proof of age or date of birth and for the relationship between the parent and the minor.

For a guardian, a notorised copy of the court order appointing the legal guardianship is necessary. You can also start an SIP for the child. In this case, the parent/guardian needs to give the ACH (Automated Clearing House) mandate for direct transfer from their bank account.

For the period that the child is a minor, the MF account will be operated by the parent or legal guardian. Once the child turns 18, the folio will be frozen for operation by the parent or legal guardian. Thereafter, the person in whose name the folio was opened, can operate the folio. Additionally, in the case of an SIP, the contributions by the parent/guardian/third-party will be suspended once the child becomes a major.

At the time of redemption, the beneficiary will have to do a fresh KYC and submit the necessary documents. Once the KYC of the beneficiary has been completed, the account status will be changed from minor to major.

Gifting of mutual funds can have certain tax implications. It is advisable to ask your tax consultant about such investments.

The writer is Senior Fund Manager, Equities, BNP Paribas Mutual Fund

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