Yes, you have the option to invest on behalf of a minor. The person investing on behalf of the minor, however, should be the minor's legal guardian or parent. Mutual funds are one option that is gaining traction as a platform for long-term objectives like children's futures. Note that the minor's mutual fund investment cannot be maintained in joint names. It must be kept exclusively in the name of the minor. Since the minor is not allowed to make financial decisions in her own name, the account would need to be managed by a designated parent or guardian. There is possibly no parent on the planet who does not want their child's future to be stable. This could include everything from leaving them an inheritance to ensuring they have enough money to pay for their higher education. Investing in mutual funds is one of the easiest ways to do this.
Documents required to open a mutual fund account in a child's name
Two important documents are needed to open a mutual fund folio for a minor. To begin, the minor's age and date of birth must be confirmed. This can be given in the form of a birth certificate or a passport issued by the local government. The minor's relationship with his or her guardian must be established. In the case of parents, a birth certificate or passport with the parent's name on it is adequate.
- Proof of the child's age is needed.
- The guardian's relationship with the child must be proven.
- A copy of the child's birth certificate or passport is sufficient evidence of the child's age and relationship with the guardian.
When the first investment is made, these records must be presented. If the guardian has other mutual fund investments with the same fund house, the paperwork does not need to be given again.
What Happens to funds when the child attains the majority?
Once the child reaches the age of 18, he or she must fill out an application for change of status from Minor to Major (MAM form) and submit it along with the necessary documents. When the minor attains the age of 18, the Asset Management Company (AMC) will halt all mutual fund investments (SIPs). The mutual funds will send a letter to the guardian and the minor's registered addresses informing them of the situation.
He or she will begin re-investing in the same folios until all of the mutual funds have been converted to "major" accounts. Acknowledgment of KYC A letter from an investor who is about to become a major should also be included.
Documents required when the child attains majority
- Duly filled MAM form
- Copy of PAN Card of the applicant
- KYC acknowledgment or a duly completed KYC form.
- The applicant's most recent Bank Statement/Passbook or a canceled cheque leaf with the applicant's name pre-printed.
- Nomination Form
- A new SIP, STP, or SWP mandate in the specified format is required.
Tax Implication on Minor Investment
The income of the minor will be combined with that of the parent or appointed guardian under current Income Tax Act provisions. Any such earnings would be taxable in the possession of the parent or guardian who is sharing the minor's earnings.
Dividends are tax-free in the hands of the investor, as are long-term capital gains kept for more than a year. However, if the minor's fund is sold by the end of the year, it will be counted as short-term capital gains and will be included in the parent or guardian's net income and taxed at their highest available tax rate.
Until the child is a minor, all profits and dividends from the child's portfolio are lumped together as part of the parent's income, and the parent is responsible for all taxes. The child will be regarded as a separate person in the year he or she turns major and will pay taxes for the number of months he or she is a major in that year.
Mutual funds, with their potential to compound capital, are good investment opportunities for building a stable future for your kids. Setting aside a small sum each month for your child's education fund will help them get a head start. Investing in mutual funds is a simple and convenient way to build a substantial fund for your children's future. However, for a smooth investment path, make sure to follow the guidelines.