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How can minors invest in mutual funds: process, documents, tax implications

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Minors can invest in mutual funds in India. Any person below the age of 18 years can invest in mutual funds with the help of a parent or guardian. So, investment in mutual funds is done by the parent or guardian on behalf of the minor child. Once the child reaches the age of majority and completes 18 years, the guardian must change the status from minor to major and then adults can invest themselves.

Let’s read on to find out how a minor can invest in mutual funds, what documents are required, the advantages and disadvantages of investing in minor's name, and the tax implications on minors' investment in mutual funds.

Minor Investment in Mutual Funds

There is no age limit for investing in mutual funds. Yes, you as the legal guardian can invest in mutual funds for your minor child. Investing early at a young age is the best way to create wealth for children's education, marriage and other purposes.

You can start a SIP on behalf of your child or invest a lump sum amount in mutual funds of your choice. A SIP can be started for as low as Rs 500 per month and helps to create huge wealth in the long run with the power of compounding.

All investment instructions given by parents for the minor's mutual fund account are valid till the child attains majority.

Process to invest in Mutual Funds in the minor name

Any individual who is under 18 is called a minor. Since minors are not capable of making financial transactions or investments themselves, all investments on behalf of minors must be made by a designated guardian. The parents, i.e. father or mother, can act as a minor's guardian, but if both parents are absent, the court may appoint a guardian to invest in the name of minor child.

1. Invest directly with Mutual Fund Companies

  • Parents or court-appointed guardians can invest in any mutual fund scheme of any asset management company (AMC) on behalf of their minor child.
  • Parents need to provide basic details such as contact number, email, etc. to apply to the fund house to create a mutual fund folio in the minor’s name.
  • Although the investment is made by the parents, the ownership lies with the minor child.
  • All payments and receipts from investments are processed from the guardian’s bank account.
  • To invest in mutual funds on behalf of a minor, proof of age and proof of relationship with the guardian must be provided.
  • Parents need to be a KYC compliant by submitting documents like PAN card, Aadhaar card, bank details, etc.
  • As a parent or guardian, you cannot appoint a nominee for the minor’s investment in mutual funds.
  • Minor joint account is not allowed.

2. Invest through Stock Broker

As minors can open a demat account in India, parents can also invest in mutual funds for minors with a stockbroker. As a parent or guardian, you need to open a demat account for your minor child. Thereafter, you can buy any mutual funds through your broker in the name of your minor child.

Not all brokers allow account openings for minors. Zerodha, Fyers and Prostocks are some of the most popular discount brokers that offer demat accounts for minors.

Documents required for Minor Investment in Mutual funds

There are several documents to be submitted to invest in mutual funds in the name of the minor child including:

  • Age proof: A valid copy of birth certificate or passport of the minor child.
  • Proof of minor’s relationship with the guardian.
  • Guardian must provide KYC documents i.e. PAN card, Aadhaar card, bank details, etc.
  • A duly filled and signed application form with the minor as the beneficial owner.

Taxation on Minor Mutual Fund Investment

Mutual fund investment for minor is not tax-free. All income from the minor’s mutual fund investment is included in the guardian's income. All capital gains on redemption of mutual funds from the minor’s account are clubbed into the income of the parent and taxed at the applicable tax rate. Thus, all the capital gains received on the minor’s mutual fund portfolio are taxed at the parent’s tax slab.

Once a child turns 18+, the child will be responsible for paying capital gain tax. Capital gains received on mutual fund investment are taxed as short-term capital gains and long-term capital gains.

Income from the redemption / sale of equity mutual fund units within a year is termed as short-term capital gains (STCG) and is taxed at a rate of 15%. If you sell equity mutual funds after one year, the benefits or gains received are termed as Long Term Capital Gains (LTCG). LTCG upto Rs 1 lakh is tax-free, above which 10% LTCG tax is levied.

Gains from the sale of units of debt mutual funds within 3 years are termed as short-term capital gains. Such gains are taxed at the applicable tax slab. However, capital gains on redemption of debt schemes after 3 years will be taxed at 20% with indexation benefits.

Pros of Investing in Mutual Funds for Minor

  • The best way to build wealth: Starting investing at an early age of the child helps the parents to create wealth for various purposes, such as higher education for the children.
  • Financial education: Investing on behalf of minors is a great way to instill financial awareness in your child. It develops a good habit of saving money.
  • Hassle-free investment process: Paperless process for investing in mutual funds.
  • Professional management: Mutual funds are a less risky investment option as each scheme is managed by professional fund managers.
  • Diversification: There are different types of mutual funds in equity, debt, and hybrid categories. This allows you to diversify your investments across multiple asset classes. There are also special solution-oriented funds, such as the children fund, which is best suited for children.

Cons of Mutual Fund Investment in the name of Minor

  • Although the child is the owner of the investment, possession is transferred when the minor reaches the age of majority. As soon as the child reaches the age of majority, he or she can make investments and redemptions.
  • Minors cannot have a joint account as nomination is not permitted.
  • Once the minor turns 18+, he/she is treated as an independent entity and must pay tax on capital gains.

When a minor attains the age of 18 years

Till your child is under 18, all investments in mutual funds are managed by the guardian. However, once your child turns 18+, the account will no longer be operative and all the existing folio will be frozen for the guardian from the day the child becomes major.

As the child becomes a major, he/she will have to fulfil the KYC requirements. The KYC details, PAN and signature of the guardian will be updated with the KYC details, PAN, and signature of the child. All new investments in mutual funds will now be made through the child’s bank account. 

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Last updated on 24th May 2024

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