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Many parents may already be considering future educational expenses, financial stability and future savings quite early in their child's life. That's why everyone has grown interested in mutual fund investments over the years. Under legal rules, a minor cannot manage investments on their own, although mutual fund investments may be made on behalf of the minor by a parent or legal guardian.
The accounts are usually held by the guardian until the child reaches adulthood. This is a structure that is often preferred by people who invest in a disciplined manner over a long period of time, as even if they invest very small amounts consistently over many years, they may have a fairly substantial investment corpus for future financial requirements.
Key Takeaways
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A mutual fund for a minor account helps parents build long-term savings gradually for education, future expenses, and financial security goals.
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Guardians manage minor mutual fund investments until adulthood, while KYC updates become necessary once the child reaches eighteen years of age.
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Opening a minor mutual fund account requires birth proof, guardian KYC documents, relationship records, and compliant bank account verification.
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SIP investments for minors usually stop automatically after adulthood until fresh KYC completion and account transition formalities are successfully finished.
Procedure for Investment in Mutual Funds on Behalf of a Minor
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All minor investments must have a specific ‘Guardian’ responsible for managing them. Usually, it is a parent who acts as the guardian. In the absence of parents, the court appoints a ‘guardian’ for the minor.
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An application must be made to a mutual fund by the guardian to create a mutual fund folio for the minor, starting with basic details such as contact numbers and email.
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The minor’s birth certificate/passport/higher secondary marksheet or school-leaving certificate (as proof of age) is needed.
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A document proving the relationship between the minor and the guardian is required. It can be the birth certificate or the passport, while for a legal guardian, a copy of the court order would be required.
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The guardian must submit Permanent Account Number (PAN) details and complete the Know Your Customer (KYC) requirements.
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In case the guardian changes, the NOC (No Objection Certificate) from the old guardian will be required in addition to the new PAN details and KYC-compliance of the new guardian. If the cause of the guardian change is the death of the old guardian, then the certificate of death is applicable instead of the NOC. Additionally, the new guardian’s signature must be attested by the bank manager where the minor's account is held.
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Although ownership lies solely with the minor child, the guardian will oversee the operational decisions related to the investments.
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Minor accounts cannot be joint folios; the minor must be the sole holder.
You can invest in a Systematic Investment Plan (SIP), a Systematic Withdrawal Plan (SWP), or a Systematic Transfer Plan (STP) in the name of the minor. As per SEBI's updated 2023 circular, payments for minor mutual fund investments may be accepted from the minor's own bank account, a joint account of the minor with the parent/guardian, or directly from the parent's or legal guardian's independent bank account. However, all redemption proceeds must be credited only to the verified bank account of the minor.
However, the minor SIP will cease to exist when the child turns 18. Upon attaining majority, the AMC will immediately freeze the folio for all further debit or credit transactions (including systematic plans and redemptions). To lift the lock, the individual must submit a Minor to Major (MAM) application form, complete their independent adult KYC process, and submit their adult PAN and new personal bank details. The account will remain frozen until this transition process is complete.
Read More About: What is SIP Investment?
Taxation of a Minor’s Mutual Fund Earnings
Under Section 64(1A) of the Income Tax Act, 1961, income from a minor's mutual fund investments is clubbed with the income of the parent (father or mother) who has the higher income, not necessarily the guardian managing the account. If the parents are separated, the income is clubbed with the parent who maintains the child. In cases where a non-parent legal guardian manages the account, the tax treatment may differ, and professional advice should be sought.
Additionally, the parent can claim an exemption of up to ₹1,500 per annum per child under Section 10(32). When the units are redeemed, relevant long-term and short-term capital gains tax also becomes applicable based on the asset class (equity or debt).
Benefits of Investing in a Mutual Fund for a Minor
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Long-term financial planning: It is a good idea to start investing early to exploit compound growth in the long run. Savings deposits may not give enough interest to outperform inflation.
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Financial literacy: Knowledge about mutual funds is an important part of financial planning and independence for the child as they grow.
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Easier to handle: Less risky and complex than investing in stocks directly; it takes up less time as professional fund managers make the day-to-day investment decisions on your behalf.
However, certain parents may not feel comfortable giving control over a large lump sum of money to a young adult once they turn 18. Therefore, they may instead invest in a mutual fund in their own name and make their child a nominee in that account. Note that a nominee only acts as a legal trustee to hold the funds in the event of the investor's death, so parents should explicitly outline asset distribution in a legal will to ensure ownership transfers smoothly.
Documents Needed to Invest in a Mutual Fund for Minors
Opening a minor mutual fund account usually requires both the child’s and guardian’s documents for verification purposes. Since the account remains linked to a guardian until the child turns 18, documentation becomes important during both account opening and later transitions.
1. Proof of Age and Date of Birth
A birth certificate, passport, or school certificate generally serves as proof of the minor’s age and date of birth.
2. Proof of Guardian-Minor Relationship
Documents showing the relationship between the guardian and the child may be required. This often includes birth certificates or legal guardianship records, where applicable.
3. Documents Proving the Guardian's KYC Compliance
The guardian usually needs PAN details, identity proof, address proof, photographs, and completed KYC verification before investment approval.
4. Validity of SIP
SIP instructions linked to the account generally remain valid only until the child reaches 18 years of age, unless updated according to revised compliance requirements later.
5. Details of the KYC Procedure When the Minor Turns 18
Once adulthood is reached, fresh KYC completion and updated bank verification generally become necessary before independent account operation continues.
6. Requirements for Change of Guardian
If the guardian changes because of legal or personal reasons, supporting legal documents and revised verification records are commonly required.
Is it Good to Invest in a Mutual Fund for Minors?
Many parents consider opening a minor mutual fund account online because long investment periods may help manage future expenses gradually. Education costs, professional courses, and other financial goals often increase significantly over time, which makes early planning important for some families.
One practical advantage of investing early is time itself. Smaller investments made regularly over long periods may grow steadily through market participation and compounding effects. Still, the suitability depends on financial goals, investment horizon, and risk comfort.
Equity-oriented funds may suit longer timelines, while conservative options may feel more comfortable for shorter-term planning. Parents also need to remember that the account eventually shifts to the child after adulthood. Because of that, documentation updates and KYC compliance become important once the minor reaches 18 years of age.
Other Avenues for Investment by Minors
A minor, with a guardian and requisite documents, can invest in:
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Stock Market: By opening a minor Demat account, a trading account and a bank account. The guardian must completely operate the trading account; the minor is legally restricted from placing direct trades until they turn 18.
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Gold: Through Sovereign Gold Bonds (SGBs) issued by the RBI, Gold ETFs, or digital gold via regulated fintech apps. (Note: The "GoldRush" digital gold scheme by StockHolding has been discontinued due to regulatory compliance.
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Real Estate: A minor can buy real estate jointly with the parents. However, because a minor is legally incompetent to enter into a binding contract under the Indian Contract Act, the guardian must execute and sign all legal documents entirely on behalf of the minor.
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Public Provident Fund (PPF): A PPF can be opened by a guardian in the name of the minor. The maximum investment cap of ₹1.5 lakh applies to the guardian's total portfolio, meaning the combined investments in the parent's and minor's PPF accounts cannot exceed ₹1.5 lakh per financial year.
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Sukanya Samriddhi Yojana (SSY): A savings scheme for the girl child under the age of 10, offering higher interest rates and tax benefits under Section 80C.
Conclusion
A mutual fund for minors is primarily useful to parents or guardians for establishing long-term investments over time, in the name of the minor. The process is typically manageable as long as the necessary documentation and details from guardians are prepared in advance. Investments can be made over several years using SIPs or a single investment, and many families like to use these types of investments for future education planning or financial support.
Yet there are rules governing the operation of the account because the minor is not allowed to handle investments on his or her own prior to reaching age 18. It is also important to note that new compliance rules typically need to be put in place when the child reaches 18. Avoiding confusion later on can be helped by understanding these transition rules at an early stage. Carefully planned small investments in mutual funds can help in disciplined long-term financial planning.
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