How to Invest in Mutual Funds for Minors?

Investing in mutual funds for minors is a great way to build a corpus for their future, whether for education, marriage, or long-term financial security. Mutual funds offer a disciplined way to invest, ensuring capital appreciation over time. But can minors invest in mutual funds? What are the legalities and risks? In this guide, we will cover everything you need to know about mutual funds for minors, including the investment process, documentation, tax implications, and more.

Can a Minor Invest in Mutual Funds?

Yes, you can invest in mutual funds for a minor, but they cannot open or manage the account themselves. It needs to be opened on their behalf by a parent or a legal guardian. The minor remains the sole account holder, but all transactions are controlled by the guardian until the child turns 18. Once the minor reaches adulthood, the account must be converted into a regular mutual fund account in their name.

Legal Considerations for Investing on Behalf of a Minor

Investing in mutual funds for minors comes with specific legal guidelines that need to be adhered to:

• Guardian's Role: Only a parent or a legal guardian can open and operate the account.
• Sole Ownership: The minor is the sole owner of the investment. The guardian cannot claim rights over the funds.
• KYC Compliance: Both the guardian and the minor must fulfill KYC (Know Your Customer) requirements.
• Conversion at 18: When the child turns 18, the account is frozen until the minor completes the KYC process to convert it into a regular account.

Note: These are the standard legal requirements while investing in a mutual fund for a minor. Different platforms and asset management companies (AMCs), may have their own specific requirements that you should remember to check beforehand.

Types of Mutual Funds Suitable for Minors

When investing in mutual funds for a minor, selecting the right type of fund requires alignment with one’s financial goals, risk appetite, and investment time horizon. Here is a detailed breakdown of suitable mutual fund types for minors:

1. Equity Mutual Funds – These are ideal for long-term wealth creation, equity funds invest in stocks and have the potential to generate higher returns over time. They are suitable for financial goals like higher education or planning funds for your child’s marriage. However, these funds carry higher market risks. Options include large-cap, mid-cap, small-cap, and sectoral/thematic funds.
2. Debt Mutual Funds – For conservative investors, debt funds offer stable returns with lower risk by investing in fixed-income securities like bonds. This makes them suitable for short- to medium-term goals. Examples of debt funds include government bond funds, liquid funds, and short-term funds.
3. Hybrid or Balanced Funds – A mix of equity and debt, hybrid funds provide moderate risk with balanced returns. These funds help mitigate market volatility and are ideal for parents seeking both stability and growth. 
4. Index Funds – Passive funds that track a stock market index (e.g., Nifty 50, Sensex). These are great for long-term investing with lower costs and reduced fund manager dependency.
5. Children’s Gift Funds – Some mutual fund houses offer special children’s gift funds with a mandatory lock-in period. These funds are structured to ensure disciplined investing for the child's future needs, like higher education or marriage.

Steps to Invest in Mutual Funds for Minors 

Investing in mutual funds for a minor requires a step-by-step process to ensure proper documentation and compliance. Here’s how you can proceed:

1. Select a Mutual Fund Based on Goals
   • Define the purpose of investment—education, marriage, or wealth creation.
   • Choose the type of fund (equity, debt, hybrid) based on the investment horizon and risk appetite.
2. Complete KYC (Know Your Customer) Compliance
   • The minor’s PAN card and birth certificate must be submitted.
   • KYC formalities must be completed for both the minor and the guardian.
3. Open a Minor’s Mutual Fund Account
   • A guardian (parent or legal guardian) must open the account on behalf of the minor.
   • The minor is the sole account holder, but the guardian manages the investments until the child turns 18.
4. Link a Bank Account
   • The mutual fund account must be linked to the minor’s bank account or a joint account with the guardian.
5. Decide Between Lump Sum and SIP Investment
   • Lump Sum Investment – Invest a one-time amount, suitable for long-term goals.
   • SIP (Systematic Investment Plan) – Invest smaller amounts regularly, reducing market timing risks and fostering disciplined investing.
6. Submit Investment Application
   • Apply through an online mutual fund investment platform, the AMC’s website or via a distributor.
7. Monitor and Manage the Investment
   • Keep track of the fund’s performance to ensure it aligns with financial goals.
   • Rebalance or switch funds if needed based on market conditions and changing requirements.
8. Conversion Upon Reaching Adulthood
   • When the minor turns 18, the account is frozen until they complete fresh KYC and convert it into an individual account.

Choosing the Right Mutual Fund 

Picking the right mutual fund for a minor involves evaluating multiple factors to ensure optimal growth and security. Here’s what to consider:

1. Define the Investment Objective

• Is the investment meant for financial goals like paying for education, marriage, or general wealth creation?
• For long-term financial goals (10+ years), equity mutual funds are preferable.
• For short-term goals (3-5 years), debt or hybrid funds are more suitable.

2. Understand Risk Appetite

• High-Risk Investors – Can consider equity mutual funds for higher returns.
• Moderate-Risk Investors – Hybrid funds provide a balance between equity and debt.
• Low-Risk Investors – Debt funds ensure capital protection and steady growth.

3. Assess Investment Horizon

• Short-Term (1-5 years) – Liquid funds or short-term debt funds provide stability.
• Medium-Term (5-10 years) – Hybrid funds balance risk and returns.
• Long-Term (10+ years) – Equity mutual funds offer maximum wealth accumulation.

4. Compare Fund Performance

• Check historical returns (3-year, 5-year, and 10-year performance).
• Compare fund ratings from agencies like CRISIL and Morningstar.

5. Consider the Expense Ratio

• Funds with lower expense ratios can reduce costs and enhance net returns.
• Index funds typically have lower expense ratios compared to actively managed funds.

6. Evaluate the Lock-In Period

• ELSS (Equity-linked Savings Scheme) has a 3-year lock-in but offers tax benefits.
• Children's gift funds may have lock-in periods to ensure disciplined saving.

7. Check Fund Manager’s Track Record

• A fund with an experienced and consistent fund manager is preferable.
• Review the fund manager’s past performance in handling market fluctuations.

Documents Required for Investing on Behalf of a Minor 

Although different investment platforms and fund houses may have their own specific requirements, typically, you need the following documents to invest in a mutual fund for a minor:

1. Minor’s Birth Certificate: Proof of age and relationship with guardian.
2. Minor’s PAN and Aadhaar Card: Mandatory for KYC compliance.
3. Guardian’s PAN Card & KYC Documents: To verify identity and address.
4. Bank Account Details: A minor’s bank account or a joint account with the guardian.

Some platforms allow for investments via UPI. In this case, you would require a valid UPI ID linked to the bank account that has been provided in the investment account. 

Risks Involved in Mutual Fund Investment for Minors

Investing in mutual funds for minors carries certain risks:

• Market Risk – Equity funds are subject to market fluctuations.
• Interest Rate Risk – Debt funds may lose value due to change in interest rates in the economy due to monetary policy announcements.
• Liquidity Risk – Some funds have lock-in periods which restrict redemptions, resulting in illiquidity of your investments for a particular time period.
• Inflation Risk – Fixed-income funds may not keep up with inflation.

Tax Implications of Investing for Minors

Taxation is an important factor in minor investment in mutual funds online:

• Clubbing of Income – Income from mutual funds in a minor’s name is clubbed with the parent’s income and taxed accordingly in the relevant financial year.
• Tax on Redemption – Equity funds held for more than one year attract a 12.5% LTCG tax on gains above ₹1.25 lakh. If sold within one year, 20% STCG is applicable.
• Tax-Saving Funds – Investment in ELSS funds provide tax deductions under Section 80C of the Income Tax Act.

Monitoring and Managing Investments 

Regular monitoring is essential to ensure investments align with your financial goals. Parents should:

• Review Portfolio Performance – Compare fund performance with benchmarks.
• Rebalance Portfolio – Assess whether your investments need to be rebalanced between equity and debt as and when required.
• Reinvest Dividends – Opt for growth options to compound wealth as dividend options deplete your return and are tax inefficient.

Conclusion

Investing in mutual funds for minors is a smart way to build a financial cushion for their future. By selecting the right funds, ensuring proper documentation, and understanding risks and tax implications, parents can create a strong financial foundation for their child. Start early, invest wisely, and secure your child’s future with a well-planned mutual fund investment.