Curious 16-Year-Old: Can Kids Like Me Invest in Mutual Funds?

Ans: Yes, minors can invest in mutual funds. But they need a guardian to operate the account.

The account will be in the minor's name, but a parent or legal guardian will manage it.

How Can a Minor Invest in Mutual Funds?
1. Guardian's Role in the Investment
A parent or court-appointed guardian must open the minor’s mutual fund account.

The guardian will sign on behalf of the minor.

Once the minor turns 18, the account must be transferred to them.

2. Documents Needed for Minor’s Investment
Minor’s birth certificate for age proof.

Guardian’s PAN card for verification.

Guardian’s bank account details for transactions.

KYC compliance for both minor and guardian.

3. Investment Can Be Only in the Minor’s Name
The mutual fund account will be in the child’s name.

A joint account is not allowed.

Only a single guardian can be linked to the account.

4. Bank Account Requirement
A separate bank account in the minor’s name is recommended.

If a minor’s account is unavailable, the guardian’s bank account can be used.

Once the minor turns 18, the bank details must be updated.

5. No Third-Party Investments Allowed
Only parents or court-appointed guardians can invest on the minor’s behalf.

Other relatives cannot contribute directly.

The guardian must ensure that all investments follow SEBI guidelines.

Benefits of Investing in Mutual Funds for Minors
1. Long-Term Growth
Investing early allows the power of compounding to work better.

A small investment today can grow into a large corpus over time.

The longer the investment stays, the better the returns.

2. Building a Corpus for Future Needs
Investments can be used for education, marriage, or other goals.

Systematic Investment Plans (SIPs) can help in disciplined investing.

The earlier you start, the less financial burden in the future.

3. Tax Benefits for Parents
The gains from the investment are taxed as per clubbing provisions.

Gains from a minor’s investments are added to the parent’s income.

If the child has no income, standard tax deductions may help reduce tax liability.

4. Financial Awareness for Children
Early investment helps children understand money and investments.

They can learn about wealth creation at a young age.

This makes them financially responsible adults.

Things to Consider Before Investing for a Minor
1. Tax Implications
LTCG tax applies to equity mutual funds above Rs. 1.25 lakh at 12.5%.

STCG tax is 20% for equity funds.

Debt fund gains are taxed as per the guardian’s tax slab.

2. Guardian’s Role Ends at 18 Years
Once the minor turns 18, they must update KYC details.

They must provide PAN and bank details.

If not updated, the account may get frozen.

3. Limited Withdrawal Options
The guardian can withdraw before the minor turns 18.

After 18, only the minor can manage withdrawals.

Some funds may require additional formalities for withdrawal.

4. Investment Should Align with Goals
Choose funds based on the time horizon.

Equity funds are better for long-term goals.

Debt funds are better for short-term needs.

Process of Transferring Mutual Fund Holdings When Minor Turns 18
1. Update KYC Details
The child must submit fresh KYC documents.

PAN card and address proof are mandatory.

The bank account must be changed to the child’s name.

2. Guardian’s Role Ends
The guardian’s authority over the account stops after 18 years.

The child becomes the sole owner of the investments.

The child can decide to redeem or continue investing.

3. No Tax-Free Transfer Benefits
The transfer from a guardian-managed account to the minor’s account is not taxable.

However, future redemptions will be taxed in the child’s name.

Proper planning helps in tax-efficient withdrawals.

Best Strategies for Investing in a Minor’s Name
1. Start Early with Small Investments
A small SIP can grow into a large amount over time.

Investing early reduces the need for high contributions later.

2. Use Tax Exemption Limits Wisely
Redeem in parts to stay within the Rs. 1.25 lakh LTCG tax exemption.

Systematic Withdrawal Plans (SWP) help in phased redemptions.

3. Avoid Direct Funds
Direct funds require more tracking and management.

Regular funds through a Certified Financial Planner provide better guidance.

The expertise of an MFD with CFP credentials ensures better fund selection.

4. Choose Actively Managed Funds Over Index Funds
Index funds give average returns and follow the market.

Actively managed funds aim for better performance.

A good fund manager can outperform the market in different cycles.

Finally
Investing in mutual funds for minors is a smart financial move.

It helps in long-term wealth creation and financial discipline.

A Certified Financial Planner can help structure the investments for better returns.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment