Mutual Funds Investment In Minor’s Account: How To Invest, Advantages And Disadvantages

Are you wondering if you can give your children the gift of long-term financial stability with mutual funds? If yes, then you should know that you can invest in mutual funds on their behalf!

“Can a minor invest in mutual funds?” is an often-repeated question in parent’s minds. The answer is that any minor (a person under the age of 18) can invest in mutual funds with the help of their parents or legal guardians till they turn 18. In this case, the minor in question is the sole account holder and is only represented by their parent or guardian. There is no provision for a joint holding in the case of a minor’s mutual fund folio.

Once your child attains the age of 18, his mutual fund folio status goes from a minor account to a regular account. As a parent or guardian, you will need to change the status of the sole account holder, or else all transactions will be stopped in the account. Once the account status is changed, the sole account holder will be responsible for any tax implications.

How can you invest in mutual funds for a minor?

A parent or guardian who has completed their KYC can invest in a mutual fund in a minor’s name.

While the investment process is the same, you need to keep some things in mind while setting up a minor account.

You need to adhere to these guidelines:

1. If you are the guardian, you will have to prove that you are a court-appointed legal guardian by producing an appointment letter issued by the court of law.
2. If you are the parent, you will need to produce proof of relationship with the minor.

Next, you need to follow these guidelines for the minor in question:

1. You need to provide age proof that confirms that the account holder is below the age of 18 at the time of the account’s opening. A government-issued proof such as an Aadhar Card, school certificate, or a valid passport will suffice.

2. The investment source bank account must be held in the name of the minor or it can be a minor/under a guardian account. This means that you cannot invest in the mutual fund through a bank account in your name. You can transfer money to the minor’s bank account and then use that money to invest in the mutual fund.

By now, you have the answer to “how can a minor invest in mutual funds?” Let us have a look at the advantages and disadvantages of investing in mutual funds in a minor’s name.

Advantages of Investing in minor's mutual fund account

1. It increases your financial discipline: As a parent, you want to provide your children with a secure future by saving up for their education, marriage, or just for the purpose of providing a safety net. Saving money for long-term goals requires financial discipline and consistency. By regularly investing through a SIP (systematic investment plan), you can remain disciplined and consistent in your investment journey. This will help you achieve your financial goal timely and attain the peace of mind you need.

2. It teaches your children the importance of savings and investments: The benefits of having a mutual fund folio in the name of a child are not limited to parents or guardians. It also makes your children more aware of financial responsibilities and teaches them the importance of starting investments early in life.

3. It increases your tax efficiency: Till the time your child is a minor, any capital gains earned on the mutual fund investment will be taxed as per your tax slab. Once your child turns 18, they will become the sole account holder, and the capital gains tax will be taxed as per their tax slab. At that age, they will likely fall into a comparatively lower tax bracket. Thus, the tax liability on the minor would be nominal.

Disadvantages of investing in mutual funds in a minor’s name

1. You will need to manually change the account status when your child turns 18: Once your child attains the age of 18, you will need to change the status of the mutual fund investment account from minor to major. This step is of vital importance. If you do not make the change timely, the account will be restricted from all future transactions. So, complete your child’s KYC and provide their PAN card to change the account status to major when the time comes.

2. Remember that you will be passing on a sizable corpus to your child: At the age of 18, your child will need to be mature enough to handle a sizeable sum of money. Their mutual fund account will be totally in their hands because there is no facility for having a joint account. So, the bonus is on you to make an informed decision for your child’s future.

Things you need to know before investing

Before investing in mutual funds, it’s important to weigh their pros and cons to make well-informed decisions:

Pros:

- Diversification

Mutual funds invest in various securities, reducing the risk associated with individual investments. This broad exposure helps in managing risks effectively.

- Professional management

Managed by experienced fund managers, mutual funds utilise professional expertise to select securities and time market entries and exits effectively.

- Liquidity

Mutual funds offer high liquidity, allowing investors to buy or sell shares easily and access their money as needed.

- Accessibility

Systematic Investment Plans (SIPs) let investors begin with small amounts and invest regularly, making it easier for individuals to enter the market without a significant initial investment.

Cons:

- Fees and expenses

Mutual funds charge management fees, administrative fees, and other expenses, which can reduce overall returns. It's important to be aware of the expense ratio and how it impacts your investment.

- Market risk

Mutual funds are exposed to market risks, meaning their value can vary with market conditions.

This volatility can impact returns, especially in the short term.

- Lack of control

Investors do not have direct control over the individual securities within the fund. Decisions are made by the fund manager, which might not always align with the investor's preferences.

- Over-diversification

While diversification is a strength, it can also lead to over-diversification, diluting potential returns. Too many holdings can make it challenging to achieve significant gains from individual high-performing investments.

Wrapping up

So, can a minor invest in mutual funds? Yes, they can, but only with the help of a parent or a legal guardian. Make sure you adhere to all guidelines, weigh the pros and cons, and always make an informed decision before investing.

If you are new to mutual fund investments, check out Moneyfy by Tata Capital. With a user-friendly interface, a wide selection of top-rated mutual funds, and goal-based investment tools, Moneyfy is the ideal investment app for beginners. Download the app, set a goal, analyze your risk profile, and discover suitable investment options with just a click!

Frequently Asked Questions

Can I open a mutual fund for my child in India?

It's possible to open a mutual fund account for your child in India. The account should be in the minor's name, with a parent or legal guardian as the custodian. The custodian manages the account until the child turns 18.

Can minors redeem mutual funds?

When mutual fund units are held on behalf of a minor, ownership vests with the minor. The guardian can operate the minor’s account only until the minor reaches the age of majority, after which the minor can manage the account themselves.

Are children's mutual funds taxable?

Investments in children's mutual funds qualify for tax deductions under Section 80C of the Income Tax Act, 1961, up to Rs. 1.5 lakhs annually. These tax benefits make them an attractive option for tax-saving purposes.

Can a 17-year-old invest in SIP?

Minors under 18 can invest in mutual funds with the help of their parents or legal guardians. The account must be held solely in the minor's name, with the parent or guardian acting on their behalf. Joint ownership is not permitted in a minor's mutual fund account.