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Can one make investments in mutual funds on minors’ names?

Mutual fund investments can’t be gifted or transferred as this is prohibited in the law

Can one make investments in mutual funds on minors’ names?
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Can one make investments in mutual funds on minors’ names?

Gifting is the most common way grandparents shower their love towards grandchildren. It’s usually a combination of love, financial assistance, sharing responsibility, etc. by the elders. They also associate with alleviating the burden on the parents and participating their way in ensuring a brighter future of the next generation. Then of course, there’s a question of passing on the legacy, their wealth, heirloom, etc.

Traditionally the gifts include gold, real estate (registered on the name of the newborn/grandchild) and then the fixed deposit in a bank, possibly the commonest financial product/instrument. Typically, the tendency to invest in gold/physical asset is directly proportional to the higher education or marriage need and most certainly to marriage needs if it’s a girl child. The rationale behind such decisions being that the property value is appreciated over a long period and could be liquidated to fulfil the requirement or gold could be either pledged, sold or made as ornaments for the wedding. Moreover, the lack of easy liquidation and the emotions attached to these gifts makes it difficult to misuse or use for any other requirements.

The other traditional financial product is the life insurance plans which could be issued upon the named child directly or the beneficiary could be a named child. Some of these plans are issued upon the child with a waiver of premium rider in-built or opted for. Waiver of premium would be applicable in an unfortunate event of parent (breadwinner), in this case the proposer dies, the further premiums to be paid would be waived-off while the policy continues without any lapsation. The policy continues uninterrupted with all the stated benefits continued while in some plans an insurance amount is released upon the death of proposer or parent and the remaining benefits continue.

Though, life insurance is a good vehicle of inter-generational transfer, the moot point is the impediment to earn higher returns. Another concern is that the funding of the future premiums beyond the initial amount that’s gifted by the grandparents. There should be an arrangement to ensure the continuity of funding of the future premiums or a single-premium plans could be opted for, which mayn’t be a great source of wealth creation.

With greater financialization and awareness among the masses, mutual funds have become a convenient mode of investing in equities for the long-term. So, could the grandparents use mutual funds to gift the grandchildren which wouldn’t involve any future commitments and could be stored for a long-term like those of the traditional assets? Though a good idea of investing in equity that too through MF for the long term, there’re certain rules/laws to be followed while exploring such options.

Firstly, no mutual fund could be gifted or transferred as this is prohibited in the law. So, gifting of MF to the grandchild or for that matter to anyone is not possible. With greater anti-money laundering (AML) guidelines, it’s now not possible for any third party to invest on behalf of the investor. The MFs won’t accept the source of funds from other than the investor himself.

In case of a minor investor, the bank account must be a joint holder along with parent(s) or a legal guardian. So, any investment other than the investor directly or jointly can’t be accepted by MFs. Earlier, the child plans of MF used to allow for third party investments i.e., like a gift amount from the grandparents after duly submitting the documentation substantiating the relationship. These plans are relatively at low risk than any of the equity funds as they’re hybrid funds where the composition is a mix of debt and equity.

But such provisions have been completely removed now. The best option now would be to add the beneficiary (grandchild) as the nominee. Also, MFs allow for up to three nominees in a single folio with parent(s) or legal guardian as the appointees. The other option is to fund the investment amount to the minor account (parent being the joint holder) and invest in any MF from there. In both these cases, the legal rights on the investment would only transfer as the grandchild turns major i.e., at the age of 18. Till then the rights of redemption, etc. are at the discretion of the parent or the guardian.

Despite these hurdles, one could look forward to investing in MF to create a robust way to generate long-term wealth. Especially, if the timeline for investing is over 10 yrs for the grandchild’s education or marriage needs, a diversified equity fund would benefit the goal.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])

K Naresh Kumar
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