SEBI Alters the Rule for Mutual Fund Investments Made in the Name of Minor

May 16, 2023

The Securities Exchange Board of India (SEBI) tweaks the mutual fund investment framework in minor’s name through a guardian. The market regulator issued a circular dated May 12, 2023 to announce the changes in the rule for mutual fund investments made in the name of minor by parent or legal guardian.

SEBI Circular dated December 24, 2019 has prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. In partial modification to this circular, it has been decided that “Payment for 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 parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed.”

Further, SEBI stated that irrespective of the source of payment for subscription, all redemption proceeds shall be credited only in the verified bank account of the minor, it could be a joint account the minor may hold with their parent/legal guardian.

In simple words, the new rule implies that, when any individual makes payment for investment in mutual funds in the name of minor or their children by any mode, they can use any of the 3 bank accounts:

  • Minor's account
  • Bank account of parents/legal guardian
  • Joint bank account of minor and parents/legal guardian

However, when those units are redeemed at a later stage, the amount will be transferred only to the bank account of the minor (which could be a joint account operated along with the parents/legal guardian).

SEBI has directed all AMCs to implement the required adjustments to permit such mutual fund transactions from June 15, 2023. SEBI's action is intended to provide uniformity across all mutual fund firms in terms of investment in minor's accounts.

Do note as per the regulator, all other provisions mentioned in the 2019 circular remains unchanged.