Mutual fund investments are fast becoming popular in India. As an increasing number of people learn about mutual funds and understand their benefits, there is also a growing inquisitiveness about investing in the name of a minor (that is, a child under 18 years of age). This is because many parents wish to invest for their child’s future in avenues that can generate stable returns. The idea is that the investment grows as the child grows. Mutual funds are one such avenue that is being increasingly preferred as a tool for meeting long-term goals such as children’s future education.
Here, we will explain the possibility, merits, demerits, and also the process of investing in mutual funds on behalf of minors.
How to invest in Mutual Funds in the name of a minor?
To begin investing in mutual funds in the name of a minor, the parent/guardian has to open a mutual fund folio in the minor child’s name. Parents/Guardians can go through some of the goal-specific mutual fund plans on the Fisdom app to make the investment process easy.
Before we dig deeper, here are some are pointers to be kept in mind
- A minor’s investment in the mutual fund cannot be in joint names. It can only be in the name of the minor as a single owner.
- Since a minor is not allowed to make financial decisions on his/her own, a parent or guardian can act as the custodian of the minor’s account.
- A mutual fund account opened in the name of a minor will have the minor as the first and sole holder.
Parents who are looking to invest in mutual funds in the name of their minor children can also do so through systematic investment plans (SIP). The SIP amount can be debited either from the parent’s designated bank account or the minor child’s account, which has been opened under designated guardianship.
- Minor SIPs automatically cease to exist once the minor attains the status of an adult (or reaches 18 years of age). After attaining the age of 18, he/she becomes the sole investor and has to go through KYC as mandated.
Documents required for mutual fund investment made for minors
There are two main documents required for opening a minor’s mutual fund account.
- Document for proof of age and date of birth of the minor. Either of the below-mentioned can be submitted.
- Birth certificate issued by the municipal authorities
- Document to establish the relationship between the minor and the parent/guardian which could be.
- Birth certificate or passport of parents – must mention the name of the parent
- For a legal guardian, a copy of the court order stating the relationship of the minor with the guardian is required.
- The parent or the guardian also has to be KYC-compliant as per SEBI regulations.
- In case the guardian of the minor changes, a no-objection certificate (NOC) is required from the current guardian. Along with this, a court order appointing the new guardian also has to be furnished. The new guardian also has to be KYC compliant.
Since a minor’s SIP account is considered valid only till he/she attains the age of 18, the minor turned adult must go through the entire KYC process under his/her name.
Do minors receive dividends and capital gains from mutual und investments?
Minors who have mutual fund folio’s under their name can receive dividends and also capital gains associated with the mutual fund. Here are the norms regarding the treatment of income received by minor through dividends or capital gains from mutual fund investments:
- Dividends and long-term capital gains from investments held beyond 1 year are tax-free in the hands of the investor.
- As per the Income Tax Act, a minor’s income must be clubbed with the parent’s or the designated guardian’s income.
- Any income received by a minor through mutual fund investment is taxable in the hands of the parent or guardian with whose income the minor’s income has been clubbed.
- In case a minor’s mutual fund is sold before the end of one year, it is treated as short-term capital gains and forms part of the total income of the parent or guardian. It is then taxed as per the applicable income tax rate.
Does it make sense to buy mutual funds in the name of a minor?
Many parents who are planning for their child’s future contemplate whether to invest in a mutual fund under the minor’s name or not. Here are some of the aspects to be considered while making this type of investment decision:
- To keep your child’s future financial needs safeguarded, it is sensible to segregate investments. If you do not opt for a mutual fund in the minor’s name, chances are that the funds may get used for other purposes.
- Blocking some funds towards a minor’s mutual fund account instills some sense of discipline in the financial planning process and can come in handy when finances are needed in the future.
- Today, there are many child mutual fund plans you can select from. However, these come with a lock-in period and therefore, may not suit your requirements.
- Investing in a mutual fund under the minor’s name can result in low flexibility as far as fund usage is concerned.
- Also, once the minor turns 18 years of age, the parent or guardian may lose control over how the funds will be used.
- Many parents opt for investments in their name and add their child’s name as beneficiary or nominee for the investment. This ensures an investment discipline and also allows adequate flexibility.
Every parent who wishes to secure his/her child’s future must consider investing in mutual funds in the minor child’s name. Along with discipline, it can also ensure the availability of funds when required for purposes such as higher education, career, marriage, etc.