You can invest in direct mutual funds for your child. Here’s how.

Many parents wish to invest in direct mutual funds online on behalf of their children, but few asset management companies offer this facility and registrar and transfer agent (RTA) websites don’t support online investing for minors. As a result, parents often end up taking the offline route, visiting a bank or a mutual fund distributor. However, this process can be cumbersome and time-consuming.

Luckily, there is a way to invest in direct mutual funds online in your child’s name using Mutual Fund Utilities (MFU), a free, industry-owned portal.

Read on to know how.

Who can be the guardian?

According to Monali Chitnis, vice president & head of operations at MFU India, the guardian of a minor applicant can either be a biological parent or a court-appointed guardian.

“Biological parents will need to submit relationship proof, while legal guardians must provide the court order appointing them,” she said.

Importantly, only one individual can be registered as the guardian in a minor’s account.

How to get started

The process starts with obtaining a Common Account Number (CAN). Chitnis explained, “CAN creation for minor applicants is completely digital and is registered instantly, subject to all required information and documents being in order.”

• To register, visit www.mfuonline.com and navigate to the ‘eCAN Registration’ section.
• Enter your email ID and phone number, then select ‘New Form’. Choose the mode of registration as ‘Electronic’.
• For investing in direct plans, leave the ARN/RIA field blank.
• Under account type, select ‘Single’ for mode of holding, and ‘Minor’ for investor category/tax status.
• Next, enter the minor’s details, including name, date of birth, FATCA information, phone number, and email ID. If the minor does not have a phone or email, you can provide the guardian’s details in these fields and select ‘Guardian’ in both declaration fields.
• Then, enter the guardian’s details, name, date of birth, FATCA information, KYC details (PAN & Adhaar), phone number, and email, along with the applicable ‘relationship with minor’ and the chosen ‘proof of relationship’.
• If you have Demat account details, you may enter them; otherwise, this field can be left blank.
• Add the bank details for transactions, upload the required documents, agree to the terms, and submit the form online.
• Once the CAN is created, the guardian create an account on MFU to manage the minor’s investments online.

Which documents are required?

Chitnis said, “Proof of the minor’s date of birth and relationship with the guardian, such as a birth certificate, school leaving certificate, higher secondary mark sheet, or passport, is mandatory. Also, valid bank proof like a cancelled cheque, bank passbook, or a statement not older than 90 days must be provided.”

Bank account rules

The bank account linked to the folio does not have to be in the minor’s name alone. “MFU accepts the minor’s own bank account, a joint account with the parent or legal guardian, or the parent/legal guardian’s bank account, provided these are registered in the minor’s folio,” Chitnis said.

While the guardian is operating the account, purchases can be made from either the minor’s bank account or that of the guardian, but redemptions can only be credited to the minor’s bank account.

Nominee and death of guardian

Appointing a nominee is not permitted in a folio opened on behalf of a minor.

In case of the guardian’s death, “a new CAN has to be created with a new guardian,” said Chitnis. The change of guardian must be registered with the AMCs, after which folios can be mapped to the new CAN.

What happens when the child turns 18?

Once the child becomes an adult, the guardian must update the account status from minor to major with the AMC or RTA. The now-adult investor will need a PAN card and must be KYC-compliant. If this update is not done, transactions will be halted. The transition typically takes 7-10 days. They must must also appoint a nominee or submit a declaration opting out of nomination.

Until the minor turns 18, all investment income is clubbed with the guardian’s income for tax purposes. Once they turn 18, they are taxed independently for the period they are a legal adult.

E S Varadarajan, chief process and risk officer, CAMS, said on the date a minor turns 18, the guardian’s access to the folio is revoked. All standing instructions such as systematic investments, withdrawals and transfers stop automatically unless fresh mandates are submitted, and no financial or non-financial transactions can be executed until the folio status is updated from minor to major.

Praveen Shankaran, chief operating officer, KFin Technologies, added that AMCs send emails reminding guardians to initiate the minor-to-major status change along with a list of required documents: PAN and KYC, new bank account proof in the name of the major applicant, banker-attested signature, FATCA/additional KYC details, and nomination details. If SIPs, STPs, or SWPs are to continue, fresh mandates must be submitted.

Shankaran added that if the guardian is a biological parent, TDS will be paid quoting the guardian’s PAN; and if the guardian is not a biological parent, TDS will be linked to the minor’s PAN.

Children’s mutual funds vs general mutual funds

Children’s mutual funds in India—such as SBI Children’s Benefit Fund—are solution-oriented schemes with a mandatory lock-in of five years or until the child turns 18, whichever comes first.

Abhishek Kumar, a Sebi-registered investment adviser and founder of SahajMoney, said, “These funds may be suitable for parents seeking disciplined, goal-oriented investing with tax benefits and who are comfortable with lower flexibility. In contrast, general mutual funds are more suitable for experienced investors who want maximum control and maintain their own investment discipline.”

“The issue is that most of these (children’s) funds are bought based on emotion rather than a clear financial plan,” he added.

Final thoughts

Investing in your child’s name is a great way to harness the power of compounding, so the earlier you start, the better.

But since joint holding isn’t allowed in a minor’s folio, the child gets sole control of the investments on turning 18, which can lead to financial mismanagement if they’re not prepared. It’s therefore equally important to instil financial responsibility beforehand.