Investing in mutual funds is a popular and effective way to grow wealth over time. While most investors think about investing in mutual funds for themselves or their dependents, investing in a minor’s name can be a strategic move. This approach can help secure a child’s financial future and aid in long-term wealth creation. While this investment strategy has its advantages, it also comes with certain limitations and considerations.
In this blog, we will explain the pros and cons of investing in mutual funds in a minor’s name to help you make an informed decision.
Understanding Mutual Fund Investments In A Minor’s Name
A minor, by definition, is any individual under the age of 18 years. While a minor cannot independently enter into legal contracts or operate a mutual fund account, investments can be made on their behalf by a parent or legal guardian.
The guardian assumes responsibility for managing the account until the minor turns 18. Upon reaching adulthood, the mutual fund account is transferred to the name of the child, who will then gain full control over the investments.
Advantages Of Investing In Mutual Funds In A Minor’s Name
Let us take a look at some of the benefits that you get when you invest in a minor’s name:
Wealth Creation From The Beginning
Power Of Compounding – Starting early allows the investment to benefit from the power of compounding, where the returns on an investment generate additional returns over time. This can lead to significant wealth growth, particularly if the investment horizon is over 10 to 20 years.
Systematic Investment Plans (SIPs) – By regularly investing small amounts in the minor’s name, parents can accumulate a large corpus by the time the child reaches adulthood.
Financial Discipline
Parents want to provide a secure future for their children by saving up for their education, marriage, or just for the purpose of providing a safety net. Saving money for the long term requires financial discipline and consistency. When you invest through an SIP, you can remain disciplined and consistent in your investment journey.
Emotional Investment
When parents invest in a mutual fund in a minor’s name, it often represents a commitment to their child’s dreams and well-being. This sense of responsibility creates a psychological barrier to using the funds for any purpose other than the intended goal.
Tax Efficiency
Till the time the child is a minor, any capital gains earned on the mutual fund investment will be taxed as per the tax slab of the parents. Once the child turns 18, they will become the sole account holder, and the capital gains will be taxed as per their tax slab. At that age, they will likely fall into a comparatively lower tax bracket. Thus, the tax liability on the minor would be nominal.
Financial Literacy
An investment account in the child’s name can create a sense of financial responsibility in them. Making investment education available to them at a young age instils a savings mindset and helps them develop good money habits.
Drawbacks Of Investing In Mutual Funds In A Minor’s Name
Investing in mutual funds under a minor’s name comes with a few drawbacks as well.
Transition Process
When the minor turns 18, the account ownership must be transferred. Otherwise, all transactions would be stopped in the account. However, this can be a cumbersome process involving documentation and formalities.
Lack Of Control Over Funds Post-Maturity
Upon turning 18, the child gains complete control over the mutual fund account. They might not always use the funds responsibly or for the intended purpose, which could counteract the original investment goals.
No Joint Holding
Unlike other investment options, mutual funds for minors typically don’t allow joint holding with parents or guardians. This limits flexibility and control over the account.
Limited Flexibility
Flexibility can be a rare commodity in the realm of mutual fund investments in the minor’s name. Withdrawals and changes in investment strategies often require the consent of parents or legal guardians until the child comes of age. This constraint can be challenging, especially in emergencies or changing financial landscapes.
Complexity Of Management
Managing investments in a minor’s name requires a thorough understanding of the operational and legal requirements. For example, guardians must ensure compliance with regulatory norms, submit necessary documents, and oversee the transition process diligently.
Tips To Maximise Benefits While Mitigating Risks
Invest for the long-term – Given the extended time horizon, consider investing in equity-oriented funds to maximise growth potential.
Maintain sufficient documentation – Ensure all necessary documents are updated and readily available to avoid delays during the transfer process.
Educate the child – Gradually introduce the child to the concept of investing, saving, and financial planning so they are well-prepared to manage their funds after turning 18.
Consider alternative instruments – Alongside mutual funds, consider investing in other instruments such as the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), or fixed deposits, which can complement the mutual fund investments and offer stability.
Investing In Mutual Funds In A Minor’s Name – The Conclusion
Investing in mutual funds in a minor’s name can be a rewarding strategy to secure your child’s financial future. The benefits of compounding returns, tax efficiency, and financial education make it an appealing option. However, it is important to be mindful of the legalities and the eventual transfer of control to the child.
As with any financial decision, due diligence, careful planning, and periodic review are crucial to maximising returns while safeguarding your child’s future. When you strike a balance between risks and rewards, you can ensure that your investment not only meets its intended purpose but also empowers your child to lead a financially secure life sign up with Koshex
Frequently Asked Questions (FAQs)
Can minors redeem mutual funds?
When mutual funds are held on behalf of a minor, the ownership vests with the minor. The guardian can operate the minor’s account only until the minor reaches the age of majority, after which the minor can manage the account themselves.
What are the documents required for opening the account on behalf of a minor?
- Birth certificate of the minor, or
- School leaving certificate/mark sheet issued by the Higher Secondary Board of respective states, ICSE, CBSE etc., or
- Passport of the minor, or
- Any other suitable proof evidencing the date of birth of the minor.
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