Investing in Mutual Funds in the Name of a Minor

Investing in mutual funds in the name of a minor is an excellent way to secure their financial future. It helps build a corpus for long-term goals like education or marriage and instills financial discipline in the family. However, this investment comes with specific regulations and considerations that parents and guardians need to be aware of.

Who Can Invest in the Name of a Minor?

In India, a minor (below 18 years) can hold mutual fund units under their name, but the investment must be operated by a guardian. The guardian can be either:

1.   A parent, or

2.   A court-appointed guardian.

Key Features of Minor Investments

1.   Account Opening: A separate mutual fund folio must be opened in the minor's name, with the guardian operating it.

o    Proof of the minor’s date of birth, such as a birth certificate or school ID, is mandatory.

o    Guardian’s KYC compliance is required.

2.   Joint Holding Not Allowed: Investments in a minor’s name cannot have joint holders.

3.   Types of Funds: Parents often prefer long-term equity mutual funds or balanced funds for such investments. These align with the long investment horizon typical of goals for minors.

4.   No Nomination Allowed: Since the minor is the sole holder, nomination is not permitted until the minor attains majority.

Operational Rules

1.   Regular Investments: Systematic Investment Plans (SIPs) are popular for investing in the name of a minor, as they allow consistent contributions.

2.   Redemption Restrictions: Redemption of units can only be requested by the guardian, and the funds are credited to the minor’s registered bank account.

3.   Conversion at Majority: Upon turning 18, the minor’s folio must be converted to an individual account. The investor must complete their own KYC and provide updated documents, including PAN and bank account details.

Advantages of Investing in a Minor’s Name

1.   Goal-Oriented Planning: Parents can plan for major milestones like higher education or marriage.

2.   Long-Term Compounding: Starting early provides the benefit of compounding over an extended period, significantly enhancing the investment corpus.

3.   Tax Efficiency: Income generated from the investment is clubbed with the guardian’s income for tax purposes until the minor turns 18, but equity mutual funds enjoy favorable tax treatment.

Things to Keep in Mind

1.   No Misuse: The investment must strictly benefit the minor. Using the funds for other purposes could lead to disputes.

2.   Documentation: Always keep records of all investments and transactions to ensure a smooth transition when the minor attains majority.

3.   KYC Compliance: Both guardian and minor must meet the mutual fund industry's KYC norms to avoid processing delays.

Conclusion

Investing in mutual funds in the name of a minor is a thoughtful way to secure their future. By adhering to regulatory guidelines and adopting a long-term investment approach, parents and guardians can ensure that these investments serve as a robust financial foundation for their child’s dreams.