What are the Pros and Cons of Investing in Mutual Funds in a Minor’s Name?

Mutual Funds are investments that pool money from various investors for purchasing a diverse portfolio of stocks, bonds or other securities. This diversification reduces risk, making Mutual Funds a suitable investment option for long-term goals such as your child’s education or marriage. There are different types of Mutual Funds. These include Equity Funds, Debt Funds and Hybrid Funds each with different risk and return profiles.

When it comes to setting aside funds for your child’s future, investing in his/ her name can be a wise decision. However, this approach comes with its own set of advantages and disadvantages. In this blog, we will explore the pros and cons of investing in Mutual Funds in a minor's name.

Pros of investing in Mutual Funds in a minor's name

Here are the various pros of choosing to open a mutual fund account for a child:

Goal-oriented financial planning

Investing in a mutual fund in a minor’s name helps you create a dedicated fund for specific purposes, like your child’s higher education or marriage, future business plans, or other goals. It ensures that a part of your investments is earmarked for your child’s future, keeping your financial planning focused.

Stronger commitment to saving

When the investment is in your child’s name, you are more emotionally committed to keeping it untouched. It builds discipline by discouraging impulsive withdrawals, ensuring the money grows over time and serves its intended purpose.

Boosts financial awareness in children

Having a mutual fund in their name helps children become aware of financial responsibility early on. As they grow, they understand the value of saving and long-term investment, even if they can’t access the funds until they turn 18 years old.

Tax efficiency benefits

Until the child turns 18 years of age, the gains from the investment are taxed as per the guardian’s tax slab. As soon as the child becomes an adult and if they have no other income, the capital gains tax becomes minimal or even nil, leading to greater overall tax savings.

Cons of investing in Mutual Funds in a minor's name

Investing in Mutual Funds in a minor’s name can be a strategic move for securing the child's future but it is also important to be aware of the potential downsides of this approach. These include:

Transfer of control at maturity

The control over the investment is transferred to the child when he/ she attains the age of majority (18 years). This can have a negative impact as the young adult might not have the experience required to manage the funds wisely.

Operational hassles

When the child turns 18, the Mutual Fund account is frozen until the transition to a major account is completed. This process involves additional paperwork and can temporarily halt the ability to make new investments or withdrawals. 

Lack of joint holding facility

In a minor’s Mutual Fund portfolio, joint holding is not allowed. The account must be solely in the minor’s name and should be managed by the parent or the guardian. This limitation can be a drawback for those who prefer Joint Accounts for additional flexibility and control.

Documents Needed to Open a Mutual Fund Account for a Child

Learn about the important documents needed to open a mutual fund for minor:

• Proof of the child’s age, like a birth certificate or passport (shows date of birth).

• Proof of guardian-minor relationship

1. The same birth certificate or passport usually suffices.

2. If you are a legal guardian (not a parent), a court-appointed guardianship letter is needed.

• Guardian’s KYC documents

1. PAN card (mandatory for all mutual fund investors).

2. Government-issued photo ID (Aadhaar, passport, voter ID, or driving licence).

3. Recent address proof (utility bill, bank statement, or Aadhaar if address is updated).

• Guardian’s photograph & signature specimen

• Required on the KYC form and application form.

• Bank account details like a cancelled cheque or a passbook copy of the minor’s or guardian’s account that will receive the redemption proceeds.

Submit these once when opening the mutual fund for a minor; additional investments with the same fund house usually don’t need fresh documents.

How can you invest in mutual funds for a minor?

• To invest in mutual funds for a minor, a parent or legal guardian must complete their own KYC first.

• Then, the mutual fund account is opened in the minor’s name, with the guardian managing it until the child turns 18 years old.

• You will need to provide documents like the minor’s birth certificate or passport for age and relationship proof.

• If you are a legal guardian (not a parent), a court-issued letter is needed.

• The investment must be made using a bank account held in the name of the minor or a minor-with-guardian account and not solely in the guardian’s name.

Things you need to know before investing

Investing in Mutual Funds on behalf of a minor is a thoughtful way to plan his/ her future. However, it is important to approach this with the right knowledge and strategy. Understanding the importance of documentation, adopting a long-term perspective, assessing risks appropriately and regularly reviewing the investments are important aspects to consider before investing in a minor’s name.

Documentation

To open a Mutual Fund account in a child's name, you will need valid proof of the child's age and relationship with the parent/ guardian. For this, the birth certificate or passport is enough. This documentation is necessary for the initial investment and is not needed for subsequent investments made in the same fund house. 

Long-term perspective

Investing in Mutual Funds for a minor should be viewed with a long-term perspective. Mutual Funds often perform best over extended periods, allowing the power of compounding to work effectively.

Risk assessment

Like any other investment option, Mutual Funds come with a set of risks. It is essential to choose funds that align with your risk tolerance and investment goals. Diversifying across different types of funds can help reduce risks. 

Monitoring and review

Review the fund’s performance regularly and ensure it aligns with the set objectives. As your child grows, his/ her needs and goals might change, requiring adjustments in the investment strategy.

Conclusion

Investing in Mutual Funds in a minor’s name can be a strategic move for securing your child’s financial future. However, it requires careful consideration of pros and cons along with detailed planning and monitoring. Always remember that what works for one may not necessarily work for the other. Therefore, it is crucial to make decisions based on your unique circumstances and after conducting thorough research.