How Can I Invest In Mutual Funds UNder A Minor's Name?
Table of Contents
Once a child attains the age of 18 and becomes a major, the first thing you as a parent/guardian need to do is change the status of the sole account holder from Minor to Major else all transactions would be stopped in the account. The tax implications will now have to be borne by the sole account holder as applicable to any investor above the age of 18 years. Until the child is a minor, all income and gains from the child's portfolio is clubbed under the parent's income and the parent pays the applicable taxes. In the year the child turns major, he/she will be treated as a separate entity and will pay taxes for the number of months for which he/she is a major in that year.
What Is The Documentation That Is Needed For Opening A Mutual Fund Investment In A Child's Name?
The guardian needs to follow the below steps for starting a mutual fund investment in a child's name:
- Valid proof of the child's age.
- Proof of the guardian's relationship with the child.
- A birth certificate copy or a passport copy is valid as proof of the age of the child and the relationship with the guardian.
These documents need to be provided when the first investment is made. If there are more mutual fund investments with the same fund house, the guardian doesn't need to provide the documentation again.
What Happens When The Child Turns 18 Years?
When the minor turns 18 years of age, the Asset Management Company (AMC) will put a stop to the investments (SIPs) in all mutual funds. The mutual funds will send a letter to the registered address of the guardian and the minor informing them of the same.
The minor will have to change the savings bank account status from minor to major. He/She will then have to follow the same process for his mutual fund account as the AMC will need a set of documents to change the status from minor to individual. Once all the mutual funds are converted to ‘major' accounts, he/she can start re-investing in the same folios.
How To Go About Investing In MFs In The Name of a minor?
The parent / guardian will have to open a mutual fund folio in the name of the minor child. Remember, the minor’s investment in the mutual fund cannot be held in joint names. It has to be necessarily held in the name of the minor only. Since the minor is not permitted to take financial decisions in her own name, there will have to be a designated parent or guardian who will be the custodian of the account. While the minor will be the first and sole holder, the guardian can be either of the parents or any legally appointed guardian.
Interestingly, if you are planning for the long term, you can also do a systematic investment plan (SIP) in the name of the minor. The debits for the SIP can either come from the parent’s designated bank account or it can come from the child's minor account, which is under the designated guardianship. One thing is important here. All minor SIPs will automatically cease to exist on the minor attaining majority (age of 18). From that point, she becomes the investor and will have to go through KYC in the proper format.
Conclusion
Mutual funds with their ability to compound money are suitable investment options to build your child's secure future. Setting aside a small amount every month helps your child get a jump start to their education kitty.
Also read- Importance And Benefits Of Life Insurance
