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Can minors invest in mutual funds?

Interested in investing at a young age? Here is everything a minor needs to know about investing in mutual funds.

They say there is no good time to enter mutual fund investments. The moment you are willing to invest, you are good to go. In terms of age, the same is true. If you are a minor or parent of one and confused about whether a can minor invest in a mutual fund, know that mutual funds are for everyone, irrespective of age. Although certain criteria must be fulfilled, in case you are a minor, it isn't much of a hassle. This article covers all such aspects of how minors can invest in mutual funds.

How can minors invest in mutual funds? 

Minors below the age of 18 can invest in mutual funds under their name with the help of parents or legal guardians until they reach the age of 18 years and are considered a major. 

Although the mutual fund portfolio will have the name of the minor, all the financial decisions, for the time being, will be taken by the parents or a legal guardian of the minor. The debits for the investment will originate from their bank account or the minor’s mutual fund account if he's under the care of a legal guardian. Apart from this, the additional money from gifts and piggy banks can be invested in the funds. There is no restriction on the investment amount for minors. 

How to invest in mutual funds as a minor? 

For this, the parents or legal guardian first have to open a mutual fund account for minor investment in mutual funds online. The minor will be the sole account holder as no joint holding is allowed. Also, there has to be an investment goal that the parents or guardian would like to achieve with mutual fund investment for the minor. 

The guardian then operates the minor’s account until the minor reaches the age of 18 years. Once a child becomes a major, the parent or guardian has to change the status of the minor to major, or else all transactions will get frozen in the account. 

Documents required for minors to invest in mutual funds

For investing in mutual funds on behalf of a minor, there are two important things you have to prove. 

  • Age of the minor
  • Your relationship with the concerned minor

It would require the following documents duly attested by a Notary Public or Judicial Magistrate First Class or a Gazetted Officer to be submitted to the AMC for opening the mutual fund account for minor

  • Mark sheet issued by respective states, ICSE, CBSE, etc., or school leaving certificate.
  • Or Passport of the minor
  • Or Suitable proof that indicates the age of the major. 

Procedure for investing in mutual funds for minors 

If you are planning to invest in the mutual fund for a minor as a parent or guardian, here is the step you have to follow to make a mutual fund investment 

  • First, the parent or guardian has to verify the minor's age through a birth certificate or passport. 
  • Then you have to prove your relationship with the minor. If you are the parents of the concerned minor, a birth certificate or passport will be sufficient. For the legal guardian, a copy of the court order will be required.
  • Once done, the minor parent or guardian has to comply with KYC rules. If you choose a SIP plan, it will stay active until the minor reaches the age of 18. Post that, it will automatically terminate. Subsequently, the minor has to complete the KYC process in his name. 

For changing the guardian name 

If you want to change the guardian's name for any reason, here is the process to follow. 

  • First, inform the AMC by applying for the change of guardian of the concerned minor. 
  • After that, you would need to submit the certain documents, such as 
  • PAN card & details and KYC acknowledgment
  • A canceled check by the new guardian is required.
  • If the previous guardian is alive, then a consent letter from them or court order. 
  • If the previous guardian is deceased, a death certificate will be required, duly attested by a government entity or AMC officer. 

Once the AMC receives all the documents, the new guardian will get registered to their records.

For changing the status of a minor to major 

Once the child reaches the age of 18, the parents are required to change the status from minor to major (MAM). For this, an application form has to be filled out and would require some documents. Parents cannot make any transaction until the MAM process is completed. However, the minor will still receive the dividend payments in his account. 

Before MAM form filling, the unit holder (minor) has to complete the following formalities. 

  • Applying for a PAN card and having it handy. 
  • Complete the KYC 
  • Change their status from minor to major in their existing bank account
  • Getting a new bank account and cheque book with their name on it. 

Once done, the applicant has to provide the following documents to the AMC

  • Filled out MAM form
  • Copy of applicant's PAN card
  • Duly filled KYC acknowledgment form
  • Applicant's current passbook or canceled check with applicant's name printed. 
  • Nomination form
  • A new SIP, STP, or SWP mandate, if you want to continue with them.

Taxation of dividends and capital gains on funds held by minor 

Until the child is a minor, all dividends and capital gains from the child's portfolio will be included under the parent's income and get taxed at the applicable tax rate and paid by the parents. 

Once the minor reaches the age of 18, he will be treated as an individual entity and have to pay taxes. The tax implications start from the same year when the minor turns major, so he has to pay the tax for the remaining number of months of the year. 

Other areas where minors can invest 

With a lot of investment options available, there are some good ones that minors and their parents can choose to invest in and start their investment journey. 

  • High yield saving accounts:It is one of the easiest way to earn a return on investment. High yield accounts offer an interest rate more than a standard savings account and better returns. However, their interest rates are less than other investment options. If you want to play it safe, save money, and earn decent returns, this is the option to go for. 
  • Certificate of deposit (CD): It's a banking investment similar to fixed deposits. CD requires to stay invented for a specific time (months or years) and helps you earn through a pre-decided interest rate. This investment is also risk-free but comes with a lock-in period, so investors have to stay invested for the time being. 
  • Stocks: By investing in stocks, investors essentially buy company shares and become the company's part owner. Investors can earn money from stock investment in two ways, first through dividends that the company pays to the shareholders and second through capital appreciation when the stock value increases. However, stock investment is risky and volatile and thus requires expertise and a high-risk appetite. Before starting stock investing, you can try virtual trading to experience how the stock market works without putting money at risk.
  • Bonds: They are comparatively more stable than stocks. Bonds are debt security. Through investing in bonds, the investors basically lend money to companies or government entities and generate capital from the interest payouts for a pre-decided time.

Conclusion 

Mutual funds are one of the convenient ways to generate a large corpus over time, which makes it an ideal investment option for adults and minors alike. If you are a parent or guardian who is investing in mutual funds for a minor, check and comply with proper guidelines to avoid end-moment hassles and penalties. Consider consulting a financial advisor to ease your task. 

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