Investing in mutual funds under a minor’s name can be an effective way to create long-term wealth, achieve financial security, and instill the importance of money at an early age. Yet, as with any investment plan, there are benefits and possible pitfalls to take into account.
Here we discuss the merits and demerits of buying mutual funds on behalf of a minor, cover the paperwork you will need to get such an account opened, and provide some conclusions to assist in your decision making.
Pros of Investing in Mutual Funds in a Minor’s Name
1. Long-Term Wealth Creation
Early investment gives the investment time to grow for a longer duration, leveraging the compounding effect. After several decades, even small payments can grow into a large corpus, and can be used to finance education, marriage, or other expenses in the future.
2. Financial Discipline and Early Exposure
Opening a mutual fund account in the name of a minor instills financial discipline at an early age. As the child matures, they can learn the importance of saving and investing, ultimately developing the ability to handle their finances responsibly.
3. Tax Efficiency
In most areas, the investments in a minor’s name might be eligible for some tax exemptions or reduced tax burdens, based on the jurisdiction’s rules. This could increase the total return on investment.
4. Diversification of Assets
Mutual funds provide a diversified set of assets, thus minimizing risk. This diversification is specifically useful in a long-term investment plan for minors, as it disperses the risk across different sectors and asset classes.
5. Goal-Oriented Savings
Investing in a child’s name serves to establish a financial objective for the future. Whether it is paying for college or providing a financial safety net when they reach adulthood, these investments establish a committed source of funds for the child’s future expenses.
Cons of Investing in Mutual Funds in a Minor’s Name
1. Limited Control Until Majority
Until the minor attains legal age, the authority over the mutual fund account is retained by the guardian. This implies the child is not in a position to make his or her own investment decisions, which may hinder financial literacy or independence.
2. Regulatory and Documentation Complexities
Opening an account under a minor’s name involves more documentation and draconian compliance with regulatory rules. The process can be more laborious than opening a regular mutual fund account.
3. Potential for Mismanagement
There is a likelihood that the investments will be left without active management or tweaking in the long term, particularly in case the market scenario fluctuates. This could lead to returns being less than anticipated in case the investment plan is not reviewed from time to time.
4. Tax Implications on Future Earnings
Although there can be short-term tax gains, any profit from the mutual fund (such as dividends or capital gains) could be taxable in the hands of the child when he/she becomes an independent investor based on the existing tax policies.
5. Emotional Decision-Making
Parents may struggle to reconcile short-run money needs and long-run growth goals. Emotional choices can cause early withdrawals or undue modifications in the investment plan.
Documents Needed to Open a Mutual Fund Account Under a Child’s Name
In opening a mutual fund account under a child’s name, you will typically be required to furnish the following documents:
- Proof of Identity of the Guardian: PAN card, Aadhaar card, passport, or voter ID.
- Proof of Identity of the Minor: A birth certificate or passport copy.
- Proof of Address of the Guardian: Recent utility bill, bank statement, or rental agreement.
- KYC Documents: Complete Know Your Customer (KYC) process for the guardian, including a recent photograph.
- Account Opening Form: A duly filled and signed application form provided by the mutual fund house.
- Nomination Details: Information regarding the nominee for the account (if applicable).
Make sure that all the documents are current and comply with the regulatory needs of your area. It’s a good idea to verify with the mutual fund provider or your financial advisor if there are any other documents or special forms.
Final Thought
Investing in mutual funds in a child’s name is a smart method of securing your child’s future while teaching them financial responsibility at an early age. The advantages of long-term wealth growth, diversification, and tax efficiencies of the option make it appealing to visionary parents and guardians.
That said, the pitfalls associated with the lack of control and regulatory issues must also be noted. With deliberate planning and periodic review of the investment, you can achieve the most from the potential while reducing the threats to the minimum. As with everything, getting advice from a financial advisor can deliver customized advice suited to your circumstances.
