Mutual Funds for minors

In addition to teaching the importance of saving and investing at a young age, this type of investment enables parents to provide a solid financial foundation for their children's long-term goals, such as marriage, skill development, or higher education.

Understanding Mutual Funds for minors

A minor mutual fund account is a specific investment account that can be opened in the name of a child below 18 years of age. Although the minor is the ultimate owner of the investments, the account is operated by a guardian (typically a parent) until the child attains majority.

As per the guidelines issued by the Securities and Exchange Board of India (SEBI) and the Companies Act, 2013, these accounts are carefully regulated to ensure transparency, accountability, and protection of the minor’s interests. All operational rights remain with the guardian until the child turns 18, after which the ownership and control transfer entirely to the now-adult investor.

How to invest in Mutual Funds for minors

A parent or guardian can start investing in Mutual Funds on behalf of a minor. Opening such an account requires adherence to a few procedural steps and documentation norms:

1. KYC of the guardian and the minor: Both must complete the Know Your Customer (KYC) process, which involves submitting valid identity and address proof.
2. Proof of age for the minor: This can be the birth certificate, passport, school leaving certificate, or marksheet.
3. Proof of relationship: The birth certificate or passport usually suffices. In cases involving legal guardians, a court order may be required.
4. PAN card of the guardian: A Permanent Account Number (PAN) is essential for tax and regulatory purposes.
5. Bank account in the minor’s name: This account is operated by the guardian until the child turns 18.
6. Application form: The mutual fund application must be filled in in the minor’s name and duly signed by the guardian.

Importantly, the account must be held solely in the minor’s name, and joint holdings are not permitted under Indian regulations. Once set up, the guardian can initiate either a lump-sum investment or a Systematic Investment Plan (SIP).

SIPs can be started for minors without any restriction. These investments continue until the child turns 18, after which the SIP is paused and resumes only once the account is converted into a major’s account with a fresh KYC.

Process flow: Opening a minor mutual fund account

1. Guardian initiates account setup
2. Submission of KYC and required documents
3. Bank account opened in the minor’s name
4. Selection of mutual fund scheme
5. Begin lump-sum or SIP investment
6. Monitor and review investment performance until the minor attains majority
7. Upon majority (age 18), convert to a major account

Role of the guardian in a minor’s mutual fund account

The guardian acts as the legal and financial custodian of the investment until the minor reaches adulthood. Their responsibilities include:

• Ensuring adherence to all KYC and documentation norms.
• Choosing suitable schemes based on risk appetite and investment horizon.
• Monitoring performance and adjusting allocations when necessary.
• Executing redemptions or additional investments as required.
• Facilitating account conversion when the minor turns 18.

Once the minor attains majority, the guardian’s authority ceases. The mutual fund house will seek fresh KYC details from the now-adult investor, following which full operational rights are transferred.

Types of Mutual Funds suitable for minors

Selecting the right mutual fund for minors depends on the financial goal, time horizon, and risk tolerance. Some popular options include:

1. Equity funds: Ideal for long-term goals (eight years or more) such as higher education or overseas studies. They carry higher risk but offer the potential for superior returns through market growth and compounding.
2. Hybrid or balanced funds: A blend of equity and debt instruments, these funds are suitable for medium-term objectives, balancing risk and reward effectively.
3. Debt funds: These are more conservative, catering to short-term needs or serving as a starting point before gradually transitioning to equities.
4. Children’s gift funds: Many asset management companies offer dedicated child-oriented plans with built-in lock-in periods. These funds are tailored to safeguard long-term goals by discouraging premature withdrawals.

Benefits of investing in Mutual Funds for minors

1. Early start and power of compounding: Starting investments when a child is young allows wealth to compound over several years, significantly enhancing the final corpus.
2. Goal-based planning: Enables parents to align investments with specific life goals such as education, career development, or marriage.
3. Financial literacy: When the child eventually takes over, they gain hands-on exposure to financial management, helping build a responsible investing mindset.
4. Flexibility of contribution: Guardians can adjust SIP amounts or make additional lump-sum investments based on financial circumstances.

Things to consider before investing

• Documentation and KYC: Ensure all records are accurate and verified to avoid delays or rejections.
• Scheme selection: Choose funds based on long-term objectives rather than short-term returns.
• Lock-in periods: Some child-specific schemes may have lock-ins ranging from five to ten years. Understand their terms before investing.
• Transition upon majority: Once the child turns 18, all rights must be legally transferred. Failure to do so may freeze the account temporarily.

Common mistakes to avoid while investing for minors

1. Incomplete paperwork: Missing or incorrect documentation can lead to delays in account creation or redemption.
2. Ignoring transition formalities: Not converting the account at majority age can halt further transactions.
3. Chasing returns without assessing risk: Opting for high-risk funds solely based on past performance can be counterproductive.
4. Neglecting tax clubbing rules: Failing to plan for income clubbing may result in avoidable tax liabilities.

The impact of disciplined SIP investing

Suppose a parent begins a ₹2,000 per month SIP in a diversified equity mutual fund for their 8-year-old child. Over the next decade, assuming an average annual return of 10 per cent, the investment could accumulate to around ₹4 lakh. This growing corpus is the result of steady contributions, market participation, and the effect of compounding over time.

When the child turns 18 and completes KYC as an adult, the entire amount becomes fully accessible. At this stage, the accumulated funds can support higher education, skill-building courses, or other early-life goals that often require meaningful financial resources.

Even modest monthly investments, when started early and maintained with discipline, can translate into financial confidence for a young adult. For many families, such planned investing becomes a cornerstone of long-term financial preparation, demonstrating that early action often leads to greater flexibility and opportunity in the years ahead.

Conclusion

A mutual fund for minors represents one of the most effective avenues for structured and goal-orientated wealth creation. It merges the discipline of long-term investing with the flexibility of modern financial instruments, all under the protective oversight of regulatory norms.

By opening a minor mutual fund account, parents can leverage the benefits of early compounding, diversification, and professional fund management. However, success depends on selecting the right schemes, maintaining compliance, and ensuring a seamless transition once the child attains majority.

In conclusion, mutual fund investing for minors is not merely an act of financial planning but a thoughtful step towards securing a child’s independence and future prosperity.