How to invest for a minor in mutual fund

Giving your child a head start on their financial future is one of the greatest gifts you can provide as a parent. Opening a mutual fund account in a child’s name can set them up for long-term growth and financial stability. Though investing on behalf of a minor requires some extra considerations, with the right planning it can be a wise move for their future.

Always remember, investing early and consistently in mutual fund on behalf of your child can help grow wealth exponentially over time through the power of market growth and compounding interest.

In this guide, we will walk you through the process step-by-step, from choosing the right funds to managing the account as your child grows up.

• Table of contents

1. Can minors invest in mutual funds?
2. Who can invest in mutual funds on behalf of a minor
3. How to invest in mutual fund as minor
4. Pros and cons of investing in mutual funds for minor
5. Documents required to open mutual fund account for a minor

Can minors invest in mutual funds?

Yes, minors can invest in mutual funds in India. In India, a person below the age of 18 years is considered a minor as per the Indian Majority Act of 1875. Minors do not have the legal authority to enter contracts, make financial decisions, open bank accounts, hold investments, or vote independently. Their parents or legal guardians make these decisions on their behalf until they turn 18.

Hence, while the mutual fund investment is made in the name of the minor, the parent/legal guardian will be the registered holder. Fund houses allow investments by minors provided the required documents like birth certificate, KYC, and guardianship proofs are submitted. The minor will take control of the investment on turning 18 years old.

Who can invest in mutual funds on behalf of a minor?

According to mutual fund regulations in India, the following individuals are allowed to invest in mutual funds on behalf of a minor:

• Parents - Parents (either the father or mother) can invest in mutual funds in the name of their minor children. They can start a Systematic Investment Plan (SIP) or make lump sum investments until the child turns 18 years old.
• Legal guardians - If the minor child does not have parents, a legal guardian appointed by the court can invest in mutual funds on their behalf. The legal guardian needs to submit the guardianship certificate while opening the mutual fund account.

Read Also: Switching Your Investor Status: From Minor to Major

How to invest in mutual fund as a minor

The process of opening a mutual fund account for a minor is similar to opening a regular mutual fund account. Here are the steps:

1. Choose the fund house: Evaluate and compare different funds based on past returns, fund management team, expenses ratio, portfolio holdings, etc.
2. Select guardian's name: The mutual fund investment must be in the name of the minor child. However, the guardian will be registered as the registered holder of the units. Choose if the account will be opened in the father's, mother’s, or legal guardian's name.
3. Fill out the application form: Fill up the mutual fund application form with the minor's details like name, date of birth, PAN, etc. Provide the guardian's details and relationship with the minor. Submit identity and address proofs for the guardian and minor.
4. Make payment: Issue a cheque or demand draft for the initial investment amount in the name of the guardian or the minor child. Most AMCs also allow online payments through net banking or UPI.
5. Submit forms: Submit the application form and documents at the nearest branch office of the Asset Management Company (AMC) or their registrar and transfer agents like CAMS, KFIN, etc. If the payment is online, the investment should reflect in a few days.

That's it. The mutual fund account statement will be dispatched to the registered guardian's address within 5-10 working days.

Read Also: How to Invest in Mutual funds in India

Pros and cons of investing in mutual funds for minor

As with any significant decision, starting a mutual fund investment in a minor’s name has advantages as well as drawbacks. Knowing these can help you make an informed choice.

Pros of minor mutual fund investments

Let us take a look at some of the minor mutual fund investment benefits where such investments are in the minor’s name-

• Head Start: Working towards securing a child’s financial future can be a rewarding process. Starting early gives more time for the power of compounding to work on your investment and potentially grow your wealth manifold.
• Financial education: Financial literacy is an essential life skill. Introducing a minor to investing can help cultivate awareness about money management. It can be a hands-on lesson in the importance of setting aside money for the future and seeing its potential to grow with consistent investing.
• Financial stability: Investing in a minor’s name can help secure their financial future. It can also give them access to better avenues for education or help them start a business. It can be the foundation on which their future successes are built.

Cons of minor mutual fund investments

• Process: Opening and managing a mutual fund account for a minor involves additional documentation and administrative processes. This can be time-consuming and may require regular updates as the minor grows older.
• Risk exposure: Like any investment, mutual funds carry a degree of risk. Market volatility can lead to losses, and the minor's portfolio might be exposed to these fluctuations. It's crucial to ensure that the investment strategy aligns with the legal guardian’s risk tolerance and time horizon.
• Potential mismanagement: If the guardian or parent managing the account does not make suitable investment decisions, it could potentially lead to suboptimal returns or even losses.
• Lack of diversification: If the mutual fund is the sole investment vehicle, there may be a lack of diversification in the minor’s overall portfolio. Diversifying investments is important to manage risk effectively.
• Transfer and ownership issues: Upon reaching the age of majority, transferring the ownership of the mutual fund to the minor can involve additional paperwork and processes.
• Long-term commitment: Starting a mutual fund for a minor often implies a long-term commitment to the investment. While this can be beneficial for wealth accumulation, it also means the funds are tied up and not readily accessible for other financial opportunities or needs.

Documents required to open mutual fund account for a minor

Here are some documents required for opening a mutual fund account for a minor:

• Birth certificate - Provides proof of the child's date of birth
• KYC documents - Identity and address proof for the guardian and minor child
• Photographs - Passport size photos of the minor and guardian
• Cancelled cheque - For registering bank details to receive redemption amounts
• Guardianship certificate- If the parents are not the guardians

Make sure all the documents submitted are self-attested by the guardian.

Conclusion

Investing in mutual funds can be a great way to secure your child's financial future. By starting early and investing consistently, you can take advantage of compounding returns and set your child up for long-term growth. You can choose equity-oriented funds suited for long-term goals and have the required documents in place before investing on behalf of your minor child.

FAQs:

What are the legal requirements for investing in a mutual fund in a minor's name?

Typically, a legal guardian or parent must invest on behalf of the minor. The minor is the primary beneficiary, and the guardian manages the account until the minor reaches adulthood.

Can a minor access and manage the mutual fund account once they turn 18?

Yes, once the minor reaches the age of majority, usually 18, they can gain control of the mutual fund account, and the role of the guardian diminishes.

Should I open a mutual fund for my child?

Investing in a mutual fund in a minor’s name can potentially add financial security when they grow into an adult. However, there are some limitations, including limited control, lack of flexibility and risk of mismanagement as well as market volatility. It is therefore important to weigh the pros and cons before deciding. Consulting with a financial advisor can help navigate these challenges and ensure the investment aligns with the guardian’s risk appetite and their financial goals for the minor.

Can you do an SIP in a mutual fund in the name of a minor?

Yes, you can start an SIP in a mutual fund in a minor's name. The investment account is managed by a guardian until the minor turns 18. A SIP return calculator can help estimate potential returns, making it easier to plan for the child’s future financial needs.

Can a minor have a Demat account?

Yes, a demat account can be opened in the name of a minor, but it needs to be operated by a guardian.

Can a minor be a joint account holder in a Mutual Fund?

No, a minor cannot be a joint account holder in a Mutual Fund.

Can I open a mutual fund for a child?

Yes, you can open a mutual fund for your child. You will be the guardian and manage the investments until they reach adulthood.

Can I open a SIP for my child?

Yes, you can start a Systematic Investment Plan (SIP) in your child’s name in a mutual fund, but the investments have to be made and handled by the parent or legal guardian. SIPs are a great way to start investing for long-term goals like education or marriage.

Which mutual fund is best for a child?

The suitable mutual fund depends on the parent or guardian’s risk appetite and goals. Generally, equity-oriented mutual funds like large-cap or multi-cap funds can offer higher long-term growth potential, but require a high risk appetite, while hybrid funds combine risk and reward potential and debt funds offer relative stability of invested capital but may not offer inflation-beating returns in the long term.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purposes only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals, and horizon. This information is subject to change without any prior notice.