Investments in mutual funds are growing in popularity in India. As more individuals become aware of mutual funds and comprehend their advantages, there is also a growing interest in investing in the name of a minor (a child under 18). This is so because many parents want to invest in areas that will produce steady returns for their children's future.
The investment is intended to rise as the child gets older. One such option that is growing increasingly popular to achieve long-term objectives, like financing children's college education, is mutual funds.
How can a minor buy a share of a mutual fund?
A parent or guardian who has completed their KYC can invest in mutual funds on a child's behalf.
Although the investment process is the same, there are specific considerations to make when opening a minor account.
You must be following these recommendations.
If you are the guardian, you must present an appointment document from the court of law to prove that you have been designated as the woman's legal guardian.
Then, for the minor in question, you must conform to the code rules:
You must present evidence proving that the account holder was under 18 when the account was created. A government-issued document, such as the Aadhar Card, a copy of educational records, or even a current passport, will do.
The bank account that serves as the investment source must be kept in the minor's name rather than the guardian's name. As a result, you cannot finance the mutual fund using your own bank account. You can deposit funds into the minor's checking account and then utilise those funds to buy shares in a mutual fund.
Pros of Making Mutual Fund Investments in a Minor's Name
The advantages of purchasing mutual funds in a minor's name are as continues to follow:
- When you invest in a minor's name, you designate a portion of your other assets for a purpose, like paying for a child's postsecondary learning.
So, investing in a minor's name provides you with the capacity to set up a specific allocation.
- Investments made in your child's name can help you become more inspired to prioritise your child's financial objectives.
Creating a corpus for your child's future will likely make you feel emotionally invested, which will stop you from giving in to the desire to take the cash away.
- The existence of various investment accounts in a child's name, in addition to parents or guardians, raises that child's awareness of financial obligations and duties.
Children who've had early ownership experiences with financial items are more prone to have a saving habit.
- Notably, long-term investments in mutual funds will improve the taxpayer's tax efficiency. This is because of the reality that any capital gains from investments in mutual funds will be taxed while the child is still a minor, according to the tax bracket of the legal guardian or parent.
- The tax burden is often low or nonexistent when a child turns 18 and has no other income. This is much less than what parents would pay, who are likely to have a higher income tax rate.
Cons of Mutual Fund Investing in a Minor's Name
The following are some disadvantages of making a mutual fund investment in a minor's name:
- Another significance to remember is that after the child reaches maturity, ownership of these investments is transferred to them.
- The account is locked until the child reaches the legal age of majority or until all the necessary documentation is in place to transfer ownership, including the child's permission to invest in or withdraw from it.
- Furthermore, it may not be a good idea to give the child substantial money while they are only 18 years old. Often, children need more maturity to handle and handle money properly. This is frequently cited as one of the drawbacks of investing in mutual funds on behalf of a minor.
- The scenario could have been better if a combined holding facility had been present. But, a minor's fund manager portfolio is not allowed to have joint ownership. Instead, your account must only be held by the minor's legal guardian or parent.
Does it make sense to purchase mutual funds in a minor's name?
Many parents who are planning strategically for their child's future wonder whether or not to invest in a mutual fund in the minor's name. The following are some factors to consider while making this type of investment decision:
- It seems sensible to divide investments needed to shield your child's future financial needs. If you don't choose one mutual fund in the minor's name, the cash will likely be utilised for another purpose.
- Blocking some cash for a minor's mutual fund account instils some discipline in the budgeting process and may be helpful later on if more cash is needed.
- Little flexibility in terms of fund usage may result from participating in a mutual fund inside the minor's name.
- Many parents choose to invest money in their child's name as the investment's beneficiary or nominee. This ensures financial discipline and gives just the appropriate amount of flexibility.
Conclusion
Every parent should consider investing in mutual funds in the name of their minor child to protect that child's future. It can guarantee the availability of funds when needed for things like higher education, a profession, marriage, etc., in addition to encouraging discipline. Make a choice that will influence your child's future after all. Always consider what might work better for you.
Hence, invest money based on your comfort level. Remember that doing your homework is important before making any investment selections.