We are all familiar with investing in mutual funds. But, did you know that you can also invest in mutual funds in the name of a minor (child under 18 years of age). While we will get into the merits and demerits of investing in the name of a minor later, it is first essential to understand how the entire process works.
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.
What are the documents required for investing in the name of a minor..
For opening a minor's mutual fund folio, there are 2 key documents required. Firstly, the proof of age and date of birth of the minor is required. This can be either provided in the form of the birth certificate issued by the municipal authorities or a passport. The second document is required to establish the relationship between the minor and the guardian. In case of parents, the birth certificate or the passport mentioning the name of the parent is sufficient. In case of a legal guardian, a copy of the court order will be required. In addition, the parent or the guardian to whom the minor is attached will have to be KYC-compliant as per the extant SEBI regulations. As stated earlier, the SIP will be valid only till the minor attains the age of 18 and automatically cease after that. Post that date, the minor turned adult will have to go through the entire KYC process in her own name. There are also cases when the guardian may have to change. In that case, a no-objection-certificate (NOC) will be required from the current guardian. Also the court order appointing the new guardian will be required. Needless to say, the new guardian will also have to be KYC compliant before becoming guardian to a minor.
What about dividends and capital gains on funds held by minor
As per the existing provisions of the Income Tax Act, all income of the minor will be clubbed with that of the parent or the designated guardian. Any such income will be taxable in the hands of the parent or guardian with whom the minor's income is being clubbed. Of course, dividends are tax-free in the hands of the investor and so are long term capital gains, when held beyond a period of 1 year. But in case the minor's fund is sold before the completion of one year, it will be treated as short term capital gains and included in the total income of the parent or guardian and taxed at their peak applicable tax rate.
Is it a good idea to buy MFs in the name of a minor?
There are actually two ways to look at it. Firstly, when you are planning for your child's future, it always makes investment sense to demarcate the investments for your child's future separately. Otherwise, investments are fungible and such funds tend to get used for other allied purposes. To that extent it instils discipline in the financial planning process. There are also child plans of mutual funds that you can select from, but that comes with a lock-in period and hence may not suit your requirements.
The argument against investing in the name of minors is that it takes away your flexibility. The day the minor turns 18 and attains majority, you will have no control over how she wants to use her funds. That is something you need to keep in mind. Another way will be to invest in your own and designate the child as the specific nominee for that particular investment. That will ensure discipline in investment; at the same time giving you adequate flexibility. The choice is entirely yours!