Parents often wonder how to open a mutual fund account for minors to financially safeguard the future of their children. Opening a minor account is quite simple. Parents and guardians need to submit the minor’s proof of age and birth certificate, along with documents proving their relationship with the minor. The minor remains the sole account holder, while their parents/guardian acts as the custodian of the account.
 

In this article, we learn all about how to invest in mutual funds for minors, focusing on the myriad aspects of such investing like account regulations, taxation norms, and documents required. With this guide on how to open mutual fund for minors, we aim to make investing for minors simpler for parents and guardians.

Parents are constantly looking for ways to secure the financial future of their children. Most investors with kids wonder if the benefits of MF investments can be extended to minors with minor accounts. Thankfully, it is not just possible, but quite easy to open an MF account for minors in India. However, before you understand how to open a mutual fund account for minors below the age of 18 years, it is important to focus on the nitty-gritties of such accounts.
 

Parents and legal guardians can invest in mutual funds in the name of the minor, until the individual reaches maturity. Minor MF accounts must be opened and operated according to the rules and guidelines set by SEBI. As per SEBI’s regulations, the minor in question must remain the sole and first account holder, represented by the parent/legal guardian. In other words, the account should be held exclusively in the name of the minor. Unlike regular MF accounts where joint ownership is permissible, minor accounts lack this feature. When a minor has a mutual fund account, the child holds ownership of the units, however, the guardian/parent handles and operates the account until the child turns 18.
 

Upon reaching 18 years of age, the minor account needs to be changed to a major account otherwise all transactions in the account will be halted. The minor’s representative - be it a parent or guardian - is responsible for updating the status of the account. Until the child turns 18, all income and gains from the mutual fund investments are added to the parent/guardian’s income. In other words, the parent pays the tax liabilities as per the applicable laws. However, tax liabilities shift once the account holder turns 18 years of age. The account holder will now be treated as a separate entity and liable to pay taxes on the investments.

Now that you know the rules and regulations governing minor accounts, it’s time to delineate how to open a mutual fund account for minors. Here’s a step-by-step guide on how to invest in mutual funds for minors:

• The minor’s parent or legal guardian can open the mutual fund account on behalf of the minor with an AMC or intermediary that offers this service. As a minor, the child is legally prohibited from making any financial decisions. Therefore, the designated parent/guardian acts as the custodian of the account until the minor turns 18 years of age.
• The guardian of the folio can be a parent or a court-appointed legal guardian. In case of the former, documents proving the parent-child relationship must be submitted. For the latter, a copy of the court order must be submitted for verification.
• The parent/guardian must submit duly attested copies of all the required documents before they can start investing in mutual fund schemes.
• The parent/guardian can choose a suitable investment method to invest on behalf of the minor account holder. If they choose to invest via SIPs or systematic investment plans, the specified SIP amount will be directly debited from the selected account on a set date at a frequency of their choosing. They can also invest with a one-time lump-sum deposit. Earlier, SEBI permitted debits from only bank accounts that were held in the name of minors. However, from May 2023 onwards, transfers are accepted from any account held by the minor, the parent/guardian, or a joint account.
• In case of systematic investment plans, SIPs will stop once the minor reaches 18 years of age. At this stage, fresh KYC proceedings need to be completed to continue with the SIP investments.
• Once 18, the newly major account holder needs to submit a minor attaining majority mutual fund form (MAM form), along with other documents like PAN, KYC form, signature, and a cancelled cheque.

Understanding how to open a mutual fund account for a minor is not enough. You should also understand the tax provisions associated with such accounts. As per Section 64(1A) of the Income Tax Act of 1961, the income accruing from the minor’s mutual fund folio must be clubbed with the income of the parent or guardian’s annual income and taxed according to the applicable tax slab. Additionally, it is important to note that the income generated from the minor’s MF folio is added to the income of the higher-earning parent.

Once the child turns 18 and sells the units, the capital gains are added to their annual income. In other words, they will now be treated as a separate tax payer and will need to shoulder the responsibility of paying capital gains taxes applicable on the investment.

Section 10(32) of the Income Tax Act offers some tax relief to parents and guardians investing on behalf of minors. The parent whose total income includes the minor’s MF earnings can claim a maximum tax exemption of Rs. 1,500 for up to two children u/s 10(32) of the Income Tax Act. However, this exemption is only available under the old tax regime. Additionally, if the parent invests in a children’s mutual fund, they can also claim an annual deduction of up to Rs. 1.5 Lakhs u/s 80(C).

As a parent or legal guardian, you can only start investing via a minor account after you have submitted certain documents to ensure compliance with SEBI’s regulations. Therefore, the next section on this how to open mutual fund account for minors guide covers the list of documents required for the account opening process in detail:
 

1. Proof of age and date of birth

You need to present documents validating the minor’s identity, age, and date of birth. The minor’s birth certificate, government-issued passport, and school-leaving certificate are accepted age proof documents. The submitted document must be attested by a gazetted officer or notary public.
 

2. Proof of guardian-minor relationship

The second document required to open a mutual fund account for a minor is one that proves the relationship between the minor and the guardian/parent. If you are a parent opening the account on behalf of your minor child, you can submit copies of their birth certificate or passport that outlines your name as the parent. If you are a legally appointed guardian, you must submit a copy of the court order that bestowed such guardianship.
 

3. Documents proving the guardian's KYC compliance

Additionally, you must also be KYC-compliant as per SEBI’s regulations. You must share your KYC details and related documents to prove such compliance.
 

4. Validity of SIP

It is important to note that SIPs started on behalf of minors remain valid only until the minor turns 18 years of age. After their 18th birthday, the account holder will be treated as an adult and the SIP will automatically cease.
 

5. Details of KYC proceeding when the minor turns 18

Once the child turns 18 years of age, she/he has to undergo fresh KYC proceedings. They will need to submit fresh identity proof documents, along with valid PAN Card details, like all other adults to ensure KYC compliance.
 

6. Requirements for change of guardian

In some cases, a change of guardian may be necessary if the existing guardian dies or wants to be replaced. To initiate and successfully process this change the current guardian must issue a NOC (No Objection Certificate) to this effect. Additionally, a fresh court order needs to be passed to prove the appointment of a new guardian for the minor. Before assuming guardianship of the minor, the newly appointed guardian must also have completed KYC proceedings according to SEBI’s regulations. With KYC-compliance, the new guardian cannot be the custodian of the minor’s MF folio and keep investing.

Learning how to invest in mutual funds for minors can be one of the most financial prudent choices a parent makes for their kids. Understanding how to open mutual fund for minors is a good idea for the following reasons:

• Opening a mutual fund account for your child helps inculcate savings and investing habits from a young age. It helps children understand the importance of consistent, goal-based savings.
• Starting early helps them benefit from a long investment horizon. In other words, investments have the time to grow and accumulate better returns under the power of compounding over the years.
• Investing early also helps ensure better recovery time. If there are losses early on, you have ample time to make up for those losses.
• Encouraging your kid to save more helps foster a disciplined approach to finances. It can help make them more inclined towards saving and investing instead of spending funds on unnecessary expenses.
• Investing in mutual funds early on helps create a diversified approach to wealth accumulation. MFs invest in various asset classes like bonds, stocks, and securities. This helps spread investment risks and hedge against the risk and volatility associated with a single investment. In other words, MFs may offer more stable returns in the long-term than other market-linked instruments.
• With an early start, minors can slowly learn general financial concepts and how the market operates. Imparting financial education early makes them better poised to make informed financial decisions once they become adults.

Parents and guardians who wish to secure the financial future of their children should understand how to open a mutual fund account for minors. Investing in mutual funds for minors can help inculcate the importance of savings and investing early, while also helping you leverage the benefits of compounding. With more time for the funds to grow, your child can have a sizable corpus by the time they turn 18. However, learning how to invest in mutual funds for minors also means understanding the regulations, taxation norms, and documentation needed. To ensure smooth account opening and management, parents and guardians must acknowledge and comply with SEBI’s regulations.