Mutual Fund Investments For Minors

Who is a minor?

As per the Indian Majority Act, 1875, anyone under the age of 18 years is a minor in India and cannot enter into any legal contract. Therefore minors are not allowed to make investments in mutual funds directly. 

Procedure for investment in mutual funds on behalf of a minor

1. All minor investments must have a specific ‘Guardian’ responsible for managing them. Usually it is a parent who acts as the guardian. In the absence of parents, the court appoints a ‘guardian’ for the minor.
2. An application must be made to a mutual fund by the guardian to create a mutual fund folio for the minor, starting with basic details such as contact numbers and email.
3. The minor’s birth certificate/passport/higher secondary marksheet or school-leaving certificate (as proof of age) is needed.
4. A document proving the relationship between the minor and the guardian is required. It can be the birth certificate or the passport while for a legal guardian, a copy of the court order would be required. 
5. The guardian must submit Permanent Account Number (PAN) details and complete  Know Your Customer (KYC) requirements.
6. In case the guardian changes, the NOC (No Objection Certificate) from the old guardian will be required in addition to the new PAN details and KYC-compliance of the new guardian. If the cause of guardian change is the death of the old guardian then the certificate of death is applicable instead of the NOC.
7. Although ownership lies solely with the minor child, the guardian will make all the payments and receipts related to the investments.
8. Minor accounts cannot be joint. 

You can invest in a Systematic Investment Plan (SIP) or a Systematic Withdrawal Plan (SWP) or Systematic Transfer Plan (STP) in the name of the minor. The investments in the SIP can come from the bank account of the parent/guardian or from the child’s minor account operated under the designated guardianship. 

However, the minor SIP will cease to exist when the child turns 18 and then he must go through the KYC process as well as submit PAN and new bank details (either new account or updated status of old account, whichever is applicable). The account will be frozen until the system is complete.

Taxation of a minor’s mutual fund earnings

All the income earned from a minor’s mutual fund investments will be clubbed with the income of the guardian under the Income Tax Act, 1961 and the guardian will be taxed accordingly. The relevant long term and short term capital gains tax also become applicable.

Benefits of investing in a mutual fund for a minor

• Long-term financial planning –

  It is a good idea to start investing early in order to exploit compound growth in the long run. Savings deposits may not give enough interest to outperform inflation.

• Financial literacy –

  knowledge about mutual funds is an important part of financial planning and independence. 

• Easier to handle –

  Less risky and complex than investing in stocks – takes up less time as fund managers make the day-to-day investment decisions on your behalf.

However, certain parents may not feel comfortable giving control over a large lump sum amount of money to a teenager. Therefore, they may instead invest in a mutual fund in their own name and make their child a nominee in that account.

Other avenues for investment by minors

A minor, with a guardian and requisite documents, can invest in:

• Stock Market – By opening a Demat account, trading account and bank account. 
• Gold – through Sovereign Gold Bonds, digital gold through GoldRush
• Real Estate – a minor can buy real estate jointly with the parents, the contract being signed by the parent as the guardian of the minor
• Public Provident Fund – a PPF can be opened by a guardian in the name of the minor.
• Sukanya Samriddhi Yojana – savings scheme for the girl child

Conclusion

Now that you know how to invest in a mutual fund in the name of a minor you can check out the best mutual fund options in order to invest in your child’s future.