How to Invest in Mutual Funds for Minors?

Setting the foundation for financial prosperity begins early, and one of the most effective ways to secure a brighter future for your child is by investing in a suitable investment plan. Mutual fund investments are a wise consideration here.
 

While the prospect may seem daunting, this blog aims to demystify the process of investing in mutual funds for minors. Here, we will take you through the essentials, from understanding risk profiles to selecting the right funds tailored to your child's needs. 
 

Whether you are a parent, guardian, or simply eager to secure a child's financial well-being, this comprehensive blog will equip you with the knowledge and confidence to embark on this rewarding journey. 
 

Let us start building a solid financial future for the next generation.

Is it Possible for Minors to Invest in a Mutual Fund Account?

Individuals under 18, categorised as minors, can engage in Mutual Fund investments with their parent's or legal guardians' support until they reach maturity. 
 

During this period, the minor assumes the role of the sole account holder, represented by their parent or guardian. It is important to note that joint ownership is not permissible for a minor's Mutual Fund folio. 
 

Establishing a clear investment objective for the minor, such as funding higher education, is crucial in this process.
 

Upon reaching the age of 18 and attaining legal adulthood, parents or guardians must update the account status from Minor to Major. Failure to do so may result in a halt of all transactions in the account. 
 

Furthermore, tax^* responsibilities will shift to the now independent account holder, subject to the applicable taxation norms for investors above 18. 
 

While the child is a minor, all earnings and gains from their portfolio are amalgamated with the parent's income, with the parent assuming tax liabilities. 
 

In the year the child attains majority, they will be treated as a distinct entity, accountable for taxes only for the duration they hold major status.

Steps to Invest in Mutual Funds for Minors

• The parent or guardian must initiate the process by opening a mutual fund folio in the minor's name. The minor is not legally allowed to make financial decisions, so a designated parent or guardian will act as the account's custodian.

• While the minor will be the primary and sole holder, the guardian can be either a parent or a legally appointed guardian.
   

  Interestingly, it is possible for those considering long-term planning to establish a systematic investment plan (SIP) in the minor's name.

• The funds for the SIP can be debited from either the parent's designated bank account or directly from the minor's account, which is under the guardianship of the designated custodian. 
   

  It is important to note that a minor’s SIP will cease on its own when they reach the age of majority (18 years old). At that point, they will become the investors and will need to complete the KYC process appropriately.

[Note: The minor's investment in the mutual fund must be held exclusively in their name; joint ownership is not permitted.]

Taxation on Mutual Funds for Minors

Under the current provisions of the Income Tax Act, any income earned by the minor is combined with the income of either the parent or the appointed guardian. This combined income is then subject to taxation^* by the respective parent or guardian.
 

It is worth noting that dividends and long-term capital gains held for over a year are exempt from taxation for the investor.
 

However, if the minor's investment is sold before a year, it falls under the category of short-term capital gains and is included in the overall income of the parent or guardian. It will be taxed at the highest applicable tax rate.

Documents Needed to Invest in Mutual Fund for Minors

Ensuring a smooth investment journey for a minor involves clearly understanding the essential documentation required. These documents establish the minor's identity and validate the relationship between the minor and their guardian. 
 

Additionally, compliance with SEBI regulations is a crucial aspect to consider. From proof of age to establishing guardianship, each document plays a vital role in safeguarding the minor's financial future. 
 

Proof of Age and Date of Birth

• Birth Certificate issued by municipal authorities

• Passport

 

Establishing Guardian-Minor Relationship

• For Parents:

  Birth Certificate or Passport with parent's name

• For Legal Guardians:

  Copy of the court order
   

Guardian's KYC Compliance

• The parent or guardian attached to the minor must be KYC-compliant in accordance with SEBI regulations.
   

Validity of SIP

• The SIP remains valid until the minor reaches 18 years of age, automatically ceasing thereafter.
   

KYC Process for the Minor upon Turning Adult

• Upon reaching adulthood, the minor must undergo the entire KYC process in their own name.
   

Change of Guardian

• In case a change of guardian is necessary, the following documents are required:
   

  • No-Objection-Certificate (NOC) from the current guardian

  • Court order appointing the new guardian

  • The new guardian must also be KYC-compliant before assuming guardianship of the minor.

Is it a Good Idea to Go Ahead with Mutual Fund Investment for Minors?

Investing in mutual funds for minors can be a prudent financial move with long-lasting benefits. 
 

• It provides a unique opportunity to foster financial literacy and instil a culture of saving and investing from a young age.

• By starting early, minors have the advantage of time on their side, allowing investments to potentially grow substantially over the years.

• One of the key advantages is the power of compounding. Thanks to the compounding effect, investments made during childhood or adolescence have more time to accumulate returns. This means that even modest initial investments can grow significantly over the long term. 

• Moreover, it instils financial discipline in minors, teaching them the importance of regular contributions towards their future.

• Furthermore, mutual funds offer a diversified investment option, spreading risk across various asset classes like stocks, bonds, and other securities. This diversity helps cushion against the volatility of individual investments and provides a more stable, potentially higher, long-term return.

• Investing in mutual funds also imparts a valuable financial education. Minors get to witness firsthand how the financial markets² work, understand the importance of research and strategy, and learn about the risks and rewards associated with investments. This early exposure can lead to informed financial decision-making in adulthood.

However, it's important to note that investing in mutual fund SIP for minors requires careful consideration of their risk tolerance, investment horizon, and financial goals. 
 

Additionally, it is crucial to choose the right type of mutual funds and monitor their performance.

A Few More Investment Options for Minors in India

When investing for minors in India, the financial landscape offers diverse options beyond just mutual funds. These avenues cater to varying risk appetites and present unique opportunities for long-term wealth creation.
 

• Savings Accounts and Fixed Deposits

  Opening a savings account or fixed deposit in the minor's name is straightforward and low-risk. It cultivates the habit of saving from an early age while earning a modest interest. This provides a stable foundation for future financial endeavours.

• Public Provident Fund (PPF)

  PPF is a government-backed, tax-saving investment option suitable for minors. A parent or legal guardian can open the account, which matures after 15 years. PPF offers tax benefits and a competitive interest rate, making it an attractive long-term investment.

• Sukanya Samriddhi Yojana (SSY)

  Specifically designed for the girl child, this scheme assists parents to save for their daughter's future. It offers an attractive interest rate along with tax benefits. This scheme provides financial security and support for a girl's education and marriage expenses.

• Equity-Linked Savings Scheme (ELSS)

  ELSS mutual funds offer tax benefits under Section 80C of the Income Tax Act. While primarily aimed at tax savings, they also provide an opportunity for capital appreciation through investments in equities. Parents or guardians can invest for minors, providing a dual advantage of tax savings and potential wealth creation.

• National Savings Certificates (NSC)

  NSC is a fixed-income investment with a five or ten-year lock-in period. It offers a competitive interest rate and tax benefits under Section 80C. NSCs can be held in the name of a minor, providing a safe avenue for wealth accumulation.

To Sum it Up

Picking the right investment plans for minors allows for a secure financial future. It is a strategic move that harnesses the power of compounding and imparts valuable financial education. 
 

Parents and guardians can shape a foundation of fiscal literacy and responsibility through options like mutual funds, stocks, and various government schemes. By judiciously navigating these avenues, minors can enter adulthood with a solid financial footing. 
 

Embracing investment plans for minors is not just a choice; it is a forward-thinking commitment towards their prosperity and financial well-being in the years to come.