For an investor who believes in an “invest-and-forget-it” policy, mutual funds may be a wise choice. However, long term investing requires patience and consistency from investors. Here, investing in the name of a minor will keep you more consistent and disciplined. As a parent, ensuring your child does not suffer in any dire financial situation can be a great motivator.
Considering the rising education costs, parents/guardians do think about the education costs they will have to bear in future. Therefore, mutual fund investing in the early stage can help you cross that street without putting any financial burden on your back.
How to Invest in a Mutual Fund Account for a Minor
Investment in a mutual fund in a minor’s name can be done by a KYC-compliant guardian. The guardian can be either a parent or a court appointed legal guardian. If you are the parent, you need to produce relationship proof and if you are a legal guardian, you’d need a letter issued by the court appointing you as the legal guardian. For the minor, you need the below-mentioned things-
1. Age proof of the minor (any Government issued proof or a school certificate, etc.)
2. The investment source bank account needs to be in the name of the minor or minor/under guardian
Let us now move on to the most interesting part of this article, the pros and cons of investing in a mutual fund in a minor’s name.
Pros Of Investing In A Mutual Fund In A Minor’s Name
● Investing in the name of a child enhances the discipline of the parent or guardian. It makes them more consistent and also, more on towards achieving the financial goal. Once you are emotionally attached tothe investment, withdrawing from the fund will be the last thing on your mind.
● Also, it's not just parents or guardians. Having a separate investment account in the name of a child makes him/her more aware regarding financial responsibilities. The feeling of owning an investment product from an early age inculcates a saving habit in the child. The child can consider mutual fund investment as his/her piggy bank and save accordingly.
● More importantly, mutual fund investment for the long term will increase the tax efficiency of the taxpayer. Till the time a child is a minor, any capital gains out of the mutual fund investment will be taxed as per the parent’s or guardian’s tax slab. Once the minor turns above 18, the capital gain tax will be in the hands of the child.
Moreover, after the age of 18, the childmight be in acomparatively lesser income tax bracket than that of a parent or a guardian. Therefore, the tax liability on the minor would be nominal.
Cons of Investing In A Mutual Fund In A Minor’s Name
● Once the child has turned 18, you will need to change the status of the investment account from minor to major. It is important to do it, otherwise, the account will be restricted from future transactions. There is a well-defined minor to major process that needs to be followed. The child who is now a major will need to have a PAN card and needs to be
● Also, there is one drawback of investing in a huge corpus. The child, at 18, might not be mature enough to handle that much amount of money. Moreover, you are not allowed to have a joint holder in the minor’s investment account. Although, that would have been a better option to have.
Make an informed decision when it comes to your child’s future. Always remember, what works for someone else may not work for you. Hence, invest as per your comfort.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.