For this reason, parents designate funds for their children as a discretionary item in their investment accounts in the minor's name, which is a more common option.

It is often preferable if the concerned minors equip themselves with the knowledge on how to start saving/investing while being a minor student in India, as well as what investment channels are available for them as "minors."

A minor, as well as their parents, must know about all the necessities involved and all the formalities that should be done for their minors to invest in mutual funds. Further, in this blog, we shall discuss the procedures and other important points that must be kept in mind while investing in mutual funds for minors.

Can an Individual Under the Age of 18 Invest in Mutual Funds?

When talking about investment, one question that comes to everyone's mind is, can a minor invest in a mutual fund? Minor investors can invest in mutual funds with the assistance and guidance of their parents or legal guardians till the age of 18.

The minor must be the only signatory and be represented by the parent or the guardian. Also, a minor’s name is not allowed as a joint holder in their Mutual Fund folio. The starting point should be an investment goal of the minor, which is to be accomplished when investing in mutual funds. These investments might include investing in higher education purposes.

When the age of a child reaches 18, the first task you as a parent or guardian should is to change the status of the account holder from minor to major; otherwise, the account will be closed for all types of transactions. Under the revised rule, the account holder will have to bear the tax implications as applicable to any individual above the age of 18 years.

However, as long as the child is still an unmarried minor, the full gains and profits from the child's portfolio are clubbed under the parent's income, and the parent pays all the relevant taxes. At the time the child turns major, he/she will have to pay one percent of his/her income for the number of months that they have been a major in that year.

Also Read about How Are Mutual Fund Returns Calculated?

Things to be Noted Before Investing

There are certain other procedures that have to be followed while investing in mutual funds for minors.

To ensure the best interest of the minor child, the investment should be made by the standard operating procedure, which is uniform universally for all investments made in the name of the minor child.

One must keep the following points in mind:

1. A minor is not mature enough to make his investments therefore all minor's investments should have a specified "Guardian" with the responsibility to manage the minor's investments. In most instances, the parents, being the natural guardians of a minor, would have to take this duty, but an appointed guardian would be considered in other cases as well.
2. A birth certificate is needed as proof of age of the concerned minor.
3. A document that proves the relationship between the minor and the guardian is also necessary.
4. The guardian will be required to submit all the major documents like bank account number, permanent account number (PAN), and complete KYC details.
5. The guardian will have to make all payments and collect receipts from the bank account concerning the investment.
6. Investment ownership will solely lie with the minor, and no nominees can be appointed to the account.

Procedures to be Completed After the Attainment of Adulthood by a Minor

While investing in mutual funds for kids, sometimes procedures need to be considered for the attainment of adulthood for any minor. Those are:

1. With the establishment of a major account, the child’s PAN and KYC have to be provided.
2. The minor's signature will replace the guardian's signature upon attestation made by the bank.
3. The account that is created in the name of the minor cannot be operated once the minor becomes an adult or attains the age of 18.
4. The minor’s account will be used to make all kinds of future transactions related to the investment.

The Bottom Line

Minors can invest in mutual funds using a guardian account managed by adults. This arrangement creates a bridge for minors through which they can invest and be monitored and protected. Custodial accounts provide these children with an opportunity to participate in the market, hence a chance to grow their wealth in the long term and acquire some financial literacy.

Nevertheless, adults need to be aware of the legal consequences and responsibilities involved in managing investments on behalf of minors. Thus, it is often advisable for parents or guardians to be aware of all the rules and regulations before choosing to invest in mutual funds for kids.