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Can Minors Invest in Mutual Funds?

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Can Minors Invest in Mutual Funds

In a world where financial literacy is becoming as essential as academic knowledge, getting a head start in investing can change a child’s future. What if you could start building wealth for your child today, even before they turn 18? That’s exactly what investing in mutual funds for minors allows. Usually, most people think about investing once they are older. However, starting early allows kids and teens to grow their money steadily with less effort. 

In fact, the beauty of mutual funds is that they offer a chance to invest in a wide variety of assets; which means even small contributions can go a long way. Yet again, while a minor cannot legally open an investment account on their own, a parent or guardian can set that path for them. Let’s take a look at how minors can take part in this process and why it is a smart choice.

Additional Read: What is Demat Account

Legal Framework for Minor Investments in Mutual Funds  

In India, the legal framework for minors investing in mutual funds ensures compliance and protects their financial interests. Here’s a brief on what you need to know:

  • Guardian Representation: This comes up first. A minor cannot invest in mutual funds independently. Investments must be made via a parent or legal guardian. The rule here is, the guardian will manage the account until the minor reaches 18 years of age.

  • KYC Compliance: Both the minor and the guardian need to complete the KYC (Know Your Customer) process. This will include submitting the minor’s birth certificate or school ID as proof of age and the guardian’s PAN card and address proof, or as requested.

  • Investment Limitations: Minors cannot operate the account themselves or nominate anyone during the minor phase. Only the guardian is authorised to make financial decisions.

  • Dedicated Minor Accounts: Mutual fund for minor calls for a minor-specific account. Once the minor turns 18, the account must be converted into a regular individual account by updating all KYC details accurately.

  • Taxation Rules: All income generated from mutual funds invested in a minor’s name is clubbed with the guardian’s income for taxation (except in cases where it qualifies for exemptions under the Income Tax Act).

How Can Minors Invest in Mutual Funds?

Investing in mutual funds for minors may be a simple process, but it requires careful adherence to the necessary regulations. Here’s a step-by-step breakdown on how you can get started:

  1. Open a Minor’s Mutual Fund Account: A minor mutual fund account must be opened in the minor’s name. A parent or legal guardian acts as the custodian of this account until the minor turns 18.

  2. Complete KYC Formalities: The minor’s birth certificate or Aadhaar card is required as age proof. The guardian’s PAN card, Aadhaar, and address proof are mandatory to fulfill KYC requirements.

  3. Make Sure You Choose the Right Mutual Fund: Always choose funds based on long-term goals like education or wealth creation. Equity funds may work for a longer term, while debt or hybrid funds are safer for a decent growth.

  4. Initial Investment: Begin with a lump sum amount or initiate a SIP (Systematic Investment Plan) for regular investments. Most fund houses have a minimum investment requirement, often as low as ₹500.

  5. Bank Account Linked to the Minor’s Name: The mutual fund account must be linked to a bank account that is either in the minor’s name or jointly operated with the guardian.

  6. Set Up SIPs or Lump Sum Investments: SIPs define a disciplined investing for long-term benefits; whereas lump sum investments may suit specific financial goals.

  7. Monitor the Investment: Guardians must track the performance of the mutual fund regularly and ensure that it aligns with the financial goals set for the minor.

  8. Account Transition at 18: When the minor turns 18, the account transitions into their name. The now-adult investor must update KYC details to take full control of the account.

Benefits of Early Mutual Fund Investments for Minors 

Investing in mutual funds at an early age can reap massive financial benefits for minors. Here’s how starting early can build the way for long-term growth and financial security:

  • Power of Compounding: When you start investing early, it maximises the compounding effect. Here, earnings generate more earnings over time, which eventually leads to solid wealth growth.

  • Disciplined Financial Habits: Investing on behalf of minors instills the value of savings and investing. This is an underrated benefit but it sets the foundation for disciplined financial behavior as they grow.

  • Long-Term Wealth Creation: Early investments offer a longer runway for wealth creation. This makes it easier to accumulate huge funds for future expenses like higher education, a business, or even early retirement planning.

  • Market Acclimatisation: Guardians can introduce minors to the way the market functions and basic financial concepts. This gives them a head start in understanding investment strategies and risks.

  • Leveraging Long Investment Horizons: Market fluctuations become less impactful over decades. This makes equity-oriented funds quite ideal for minors to reap maximum returns from market cycles.

  • Tax Efficiency: While the guardian’s income clubbing rule applies, some tax-saving mutual funds can still provide benefits under Section 80C. This can help with the family’s overall tax strategy.

  • Flexibility in Investment Options: With mutual fund sip for minor, lump sums, and a variety of funds to choose from, guardians can build a diversified portfolio which is specifically tailored to the minor’s future needs.

  • Financial Independence Early in Life: By the time the minor becomes an adult, they already have a financial corpus ready. This allows them to focus on their ambitions and goals rather than financial problems.

  • Beating Inflation Over Time: Early mutual fund investments make sure that the purchasing power of money is maintained or increased over time. This can counter inflation.

Types of Mutual Funds Suitable for Minors

Choosing the right type of mutual fund for minors is all about balancing the risk, the growth potential, and long-term goals. Here are a few types of mutual funds that align with the needs of minors. 

  1. Equity Mutual Funds: It is best for long-term growth. Equity funds invest in stocks, that generally offers higher returns over extended periods.

  2. Hybrid Mutual Funds: This combines equity and debt instruments. Overall, it balances growth and stability. It minimises risk while also offering moderate returns. It is suitable for medium-term goals.

  3. Debt Mutual Funds: This type of funds are ideal for low-risk investments with stable returns. Debt funds invest in government securities, bonds, and fixed-income instruments. Short-term or liquid debt funds ensure liquidity for immediate financial needs. 

  4. Tax-Saving Funds (ELSS): ELSS funds offer tax benefits under Section 80C while also generating returns through equity investments. Investments can help guardians optimise family tax planning while building wealth over the long term.

  5. Index Funds: Tracks indices like Nifty 50 or Sensex. It offers market-average returns with minimal management fees. With a broad market exposure, index funds are an excellent choice for those who are seeking low-cost, diversified investments.

  6. Children’s Gift Funds: This is specially designed for minors. Such funds have a lock-in period aligned with the child’s future. It is usually a combination of equity and debt exposure that helps balance growth and safety. 

  7. SIP-Based Funds: SIPs (Systematic Investment Plans) encourage disciplined investment with small and regular contributions. This makes it easier for guardians to build a corpus gradually, irrespective of market conditions.

  8. Multi-Asset Funds: These funds invest in multiple asset classes, like debt, equities, and gold, reducing the impact of market volatility. This is ideal for families looking for a diversified portfolio in a single investment.

Additional Read: ELSS vs SIP

How to Start SWP in Mutual Funds? 

An SWP (Systematic Withdrawal Plan) allows investors to withdraw certain fixed amounts regularly from their mutual fund investments. This makes it a solid tool for minors’ future financial needs. Here’s how to start:

  • Choose the Right Mutual Fund: Always choose a fund that has a stable return history and suited to long-term goals. Usually, equity or hybrid funds are ideal if the purpose is to withdraw funds for any future purchases.

  • Complete KYC Formalities: For minors, the guardian must fulfill the KYC process. Submit all essential documents like child’s birth certificate, guardian’s ID proof, and address proof.

  • Link an Investment Account: Open a minor’s investment account where the guardian operates until the child turns 18. Make sure that the linked bank account is active for regular withdrawals.

  • Invest a Lump Sum or SIP: Start by investing a lump sum or through a SIP to build the corpus. The larger the corpus, the more flexible the SWP.

  • Select the SWP Option: First off, decide the fixed amount to withdraw periodically. Next up, select a frequency. Choose monthly, quarterly, or yearly withdrawals based on the minor’s financial needs.

  • Set the Start Date: Specify when the withdrawals should begin. Align this with all anticipated expenses like school fees, extracurricular activities, or higher education.

  • Monitor and Adjust: Keep track of the fund’s performance regularly. If the returns or withdrawal rate are unsustainable, always make necessary adjustments to the SWP plan.

  • Understand Tax Implications: For minors, any capital gains are clubbed with the guardian’s income for tax purposes. Equity funds enjoy favorable taxation if held for over a year. However, withdrawals within a year may attract short-term capital gains tax.

Monitor and Manage Minor’s Mutual Fund Investments

Here are some actionable ways to monitor and manage mutual fund account for minors: 

  • Regular Portfolio Reviews: Make sure to assess the fund’s performance regularly. It must align with your financial goals. Compare returns to measure its consistency.

  • Keep an Eye on Market Trends: Stay updated on market conditions. While minors have a long investment horizon, certain changes in the market can influence the performance of funds and may require adjustments.

  • Rebalance the Portfolio: As the child grows, their financial goals may evolve naturally. Hence, adjust the portfolio by reducing risk in later years.

  • Keep an Eye on Tax Implications: For minors, investment gains are clubbed with the guardian’s income. Hence, keep track of this while planning withdrawals to get tax efficiency.

  • Use Digital Tools: Take advantage of mobile apps and online portals offered by fund houses or third-party platforms. There are several apps that offer reminders, performance reports, and rebalancing suggestions. It helps you to track your investments better.

Final Takeaway  

Investing in mutual funds for minors is the best investment for your child’s future, that teaches them the basics of wealth-building, risk management, and the benefits of early financial planning. By opening a mutual fund account for a minor, you give them a head start that many adults never had. In fact, this early exposure to investments can even create long-term financial benefits that pay off well into their adulthood. The sooner you take that first step, the bigger the future payoff; both in terms of money and life skills. Nevertheless, the key to making the most out of this opportunity is knowing how to manage investments wisely. Hence, make sure they actually align with long-term goals.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

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Can a minor invest in SIPs (Systematic Investment Plans)?

Answer Field

Yes, minors can invest in SIPs. Guardians can set up a SIP in the minor’s name by linking it to a bank account operated by the guardian. The SIP continues until the minor turns 18. After this, they can decide to continue or modify the plan.

Are there any restrictions on the types of mutual funds minors can invest in?

Answer Field

Yes. Minors cannot invest in mutual funds meant for speculative purposes, like derivatives or commodities funds. They are primarily limited to debt funds, equity funds, hybrid funds, and index funds. However, fund houses may have their own set of restrictions.

What happens if the guardian passes away before the minor turns 18?

Answer Field

In case the guardian passes away, the mutual fund account gets frozen until a new guardian is appointed. The new guardian, typically appointed by the court or legal authority, must again provide all relevant documents to the fund house to take control over the minor’s account.

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Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.