Pros & Cons of Investing in Mutual Funds in A Minor’s Name

28 September 2022
4 min read

Can a minor invest in Mutual Funds? Well, the answer is yes, a minor can invest in Mutual Funds with the assistance of their parents or legal guardians. In addition, investments in any instrument may be made on behalf of a minor child, that is, a child under 18, by all Mutual Fund companies.

You can certainly do it with Mutual Funds if you believe that trying to hold the investments in your child's name might very well keep you more energized and diligent in circling up a specific allotment from your other investments.

However, any income or capital gains from these investments would be considered the child's income once the child reaches the age of maturity.

There are some benefits and drawbacks to this Mutual Fund investment process in a minor's name. This blog will discuss the Pros and Cons of investing in Mutual Funds in a minor’s name.

The Mutual Funds pros and cons for investing in a minor's name are listed below, so read on!

Pros of Investing in Mutual Funds in A Minor's Name

The benefits of investing in Mutual Funds in a minor's name are listed below-

  • Investing in a minor's name means setting aside a portion of your other investments for a specific purpose, such as funding a child's higher education.

    So, investing in a minor's name enables you to establish a particular allocation.

  • Investments made in your child's name can assist you in developing greater motivation to make financial goals for your child a priority.

    You are highly likely to become emotionally invested in building a corpus for the future of your child, which will keep you from giving in to the desire to withdraw the money.

  • Additionally, not only parents or guardians but the existence of a different investment account in a child's name increases that child's awareness of financial responsibilities and obligations.

    Early ownership experiences with investment products help children develop the tendency to save money.

  • Notably, long-term mutual fund investments will improve the taxpayer's tax efficiency. This is because any capital gains from the investment in mutual funds will be taxed according to the tax bracket of the parent or legal guardian while the child is still a minor.

    The child will be responsible for paying capital gains tax once they are 18+

  • When a child turns 18 and has no other source of income, the tax obligation is typically minimal or non-existent. This would be significantly less than what parents, probably in a higher income tax bracket, would pay.

Cons of Investing in Mutual Funds in A Minor's Name

The disadvantages of investing in Mutual Funds in a minor's name are listed below-

  • The possession of these investments is transferred to the child once they reach the age of maturity, which is another crucial point to keep in mind.

    When the child reaches the age of maturity, the account is frozen until the necessary paperwork is in place to transfer ownership, including the right for the child to make investments in or withdrawals from it.

  • Additionally, passing a sizable sum of money to the child when the child is only 18 may not be a good idea. Children occasionally lack the maturity to handle money properly and use it correctly. Many people consider this as one of the disadvantages of investing in a Mutual Fund on behalf of a minor.

  • The situation would have been preferable if a joint holding facility had existed. However, common ownership is not permitted in a minor's mutual fund portfolio. Instead, the minor's parent or legal guardian must act as the account's sole representative.

Paperwork Required to Open a Mutual Fund Account in A Child's Name

Following procedures must be followed by the guardian to begin a Mutual Fund investment in a child's or a minor’s name:

  • Authentic evidence of the child's age.
  • Proof of the child's relationship with the guardian.
  • A copy of the child's birth certificate or passport is acceptable as evidence of the child's age and the relationship to the guardian.

When the initial investment is made, these documents must be provided. However, the guardian need not submit the supporting documents again if there are additional Mutual Fund investments with the same fund house.

Wrapping Up

In conclusion, make an informed choice regarding your child's future. Always remember that what may not work for you may work for someone else.

So, invest according to your comfort level. However, keep in mind that before making any investment decisions, it is crucial to conduct your research.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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