We often assume that stock investments are mainly for adults, as kids must first learn valuable lessons about financial management before they foray into the markets. However, this thinking undermines the power of capital growth in the long term. Parents or guardians too can invest in stocks on behalf of minors, such that, in the long run, the minor can watch his/her money grow manifold.
Funds that are invested on behalf of minors can remain invested for several years to fetch good positive returns on the initial investment. As minors see their money grow over time, it can encourage them to learn the importance and techniques of investing.
Here are some important aspects to know about investing in stocks for minors, including how to open a minor’s first brokerage account.
Can a minor invest in stocks?
The first doubt that every parent may have regarding stock investment for minors is whether their child is eligible for stock market investment. The answer is that there is no minimum age limit set by the Indian legal structure for stock market investment. The law focuses on certain terms and conditions to be followed while investing on behalf of minors.
If a minor is interested and willing to gain exposure to the stock market by himself/herself, they can do so legally. However, before starting off:
- It is important to have some basic knowledge of the stock market and
- Understanding a company’s financial statements can be of added advantage
Trading and Demat account
For a minor to begin investing in stocks, a trading and Demat account are to be opened in the name of the minor by a guardian or parent. The guardian has to be a legal guardian, a parent or relative acting as a legal guardian.
Documentation requirements for account opening
Some of the important documents required for proceeding with account opening for minors are:
- PAN card of the minor and the parent or guardian
- Address proof
- Date of birth proof of minor child
- Account opening application form
Minor’s Demat account
It is possible to open a Demat account on behalf of minors, however, minors cannot open this account by themselves. The parents or guardians of interested minors can open and must operate the minor’s Demat account until he/she attains adulthood. This also allows parents or guardians to ensure a safe head start for the minor in stock market investments.
Minor’s trading account
A minor cannot, by himself/herself, use a trading account for buying or selling stocks. The trading account must be operated by parents or guardians on behalf of the minor. Also, minor trading accounts cannot indulge in intraday or derivative trading.
What happens once the minor turns adult?
After attaining 18 years of age, a minor is considered an adult and can choose one of these options:
- A minor can close the existing account under ‘minor’ category and open a fresh trading account as an adult. If he/she chooses to open a new account, all the existing securities can be transferred to the new account.
- It is also possible for a minor to continue the existing account by submitting the necessary documents pertaining to the current age to the broker.
Starting Early: How Minors Can Begin Investing in Stocks
Here are some things for minors who want to begin investing in stocks early on:
- Start small. While investing on behalf of minors or if minors are investing by themselves, it makes sense to invest only such amount of money that they can afford to lose.
- Invest for the long term. Stocks can be volatile in the short term, but they tend to go up in value over the long term.
- Choose safe investments. Blue-chip stocks and index funds are good options for minors.
- Do your research. Before investing, minors should learn about the companies they are investing in.
- Get help from a financial advisor. A financial advisor can help minors create an investment plan that is appropriate for their age and risk tolerance.
Benefits of Minors Investing in Stocks
Having a Demat account for minors can offer various advantages, such as:
- In case the minor gets ownership of stocks or other tradeable securities from his/her family or inheritance, the same can be easily transferred to the account.
- Minors who are interested in gaining exposure to stock markets can learn the account functionalities at an early age and become experienced traders/investors by the time they attain adulthood.
- A minor can also participate in IPO allotment. The minor’s account can also be used by the parent or guardian to get an allotment of IPO shares. This way, the minors can potentially enjoy significant returns from the stocks in the long run.
Considerations for Minors Investing in Stocks
Listed here are crucial points to bear in mind before beginning investment in stock markets for minors:
- As per our legal framework, a minor is not considered capable of making informed financial decisions by himself/herself. Therefore, any investment made by or on behalf of a minor must have a parent or guardian who will be responsible for managing the investments.
- As a proof of age, the minor’s birth certificate must be furnished at the time of account opening or conversion into a major/adult account.
- The parent/guardian must furnish appropriate proof of relationship with the minor.
- While handling the minor’s trading or Demat account, the parent or guardian must make or receive payments towards any investment from their bank account.
- The minor child holds sole ownership of the investment.
- A minor’s trading and Demat account cannot be under joint ownership and no nominees can be attached to the same.
Legal Guidelines for Minors Investing in the Stock Market
Here are the legal guidelines to keep in mind regarding minors investing in the stock market:
- A minor cannot open a brokerage account in their own name. The account must be opened in the name of a parent or legal guardian, who will be the custodian of the account.
- The custodian is responsible for managing the account and making investment decisions on behalf of the minor. They must act in the best interests of the minor and must not make any unauthorized trades.
- The minor cannot trade securities on their own. All trades must be made by the custodian.
- The minor’s earnings from the account are considered to be the income of the custodian. The custodian is responsible for paying taxes on the earnings.
Every prospective investor, whether minor or major, must be able to decode a company’s financials before investing in the stock markets. Once an investor has the ability to decipher the financials, he/she can anticipate a company’s future prospects and accordingly take investment decisions.
An individual who is below 18 years of age is considered a minor in India.
Yes, as per SEBI guidelines, you can open a trading/Demat account for your minor child with any registered broker in India. However, it has to be operated by you as a parent or a legal guardian of the child.
While a minor does not have to pay taxes by himself/herself on earnings from stocks, the income is added to the minor’s parent’s income and they will have to pay income tax on the same. A minor need not file separate income tax returns since his/her earnings are combined with the parent’s income.
Parents or guardians can use their minor child’s Demat and trading account for stock investments made on behalf of the child. Minors cannot use the accounts until they attain adulthood, hence parents must manage the account on their behalf.
Just like stock investments, minors can invest in equity mutual funds with the help of their parents or guardian.