According to the Indian Trusts Act, of 1882, a minor can be a beneficiary of a trust but cannot be a trustee or an executor. Therefore, a legal guardian, such as a parent or grandparent, must open and manage the mutual fund account on behalf of the minor.
Know in Detail if Minors Can Invest in Mutual Funds
Can Minors Invest in Mutual Funds?
Parents or legal guardians can open a minor account for the child and invest in mutual funds on their behalf. Here are seven general stages of the mutual fund investment process for minors:
Step 1: Appoint a Legal Guardian: A legal guardian has to manage mutual fund investments on behalf of the minor. This can be a parent, grandparent, or other authorised legal guardians who can make financial decisions on the minor's behalf.
Step 2: Open a Minor's Account: It is a type of account opened in the minor's name that their legal guardian manages. These accounts are typically used to invest on behalf of minors.
Step 3: Choose the Right Mutual Fund: Legal guardians should select a mutual fund scheme that aligns with their investment objectives and risk appetite. Here are the steps involved while choosing a mutual fund:
- Application Form: Fill out the mutual fund application form by providing all necessary details, such as:
- Full name of the minor
- Minor's date of birth
- Minor's PAN card information
The parent or legal guardian will have to provide the aforementioned details as well.
- Provide KYC Documents: Submit required Know Your Customer (KYC) documents of the minor, which include:
- Proof of identity, i.e., Aadhaar or PAN card
- Address proof, i.e., PAN or Aadhaar card
- Age proof, i.e., birth certificate
The parent or legal guardian will also have to submit their KYC documents, including:
- Proof of identity
- Address proof
- PAN card details
- Bank account details
- Relationship proof with minor
The legal guardian needs to fund the minor's account by making an initial deposit or transferring funds from another account.
Step 4: Fund Investment: After the account is opened, the parent or legal guardian can operate mutual funds in the minor’s name. The investment can be made through a one-time lump sum or a Systematic Investment Plan (SIP).
Step 5: Monitor Investment: The legal guardian needs to monitor the mutual fund investment periodically and make necessary adjustments to ensure it remains in line with risk tolerance and the minor's long-term financial goals.
Any money invested in the minor's account should only be used for their benefit and not be withdrawn until they reach majority age. The parent or legal guardian controls the account and investment until the minor reaches legal age, at which point the minor gains control over their account.
What Happens When a Minor Turns Major?
When a minor turns 18, they reach the age of majority and gain the legal capacity to enter into contracts and own assets. This means that they are now fully responsible for their own financial decisions and can independently manage their investments, bank accounts, and other financial assets.
Here are 6 key things that change when a child turns into an adult:
1. Take Control Over InvestmentsThe parent or legal guardian will no longer have control over the minor's investments. Kids can now independently manage and make decisions about their investments, such as buying or selling mutual funds, stocks, or bonds.
2. Must Apply for a PAN Card
Minors will now be eligible to apply for their Permanent Account Number (PAN) card, which is necessary for various financial transactions, such as:
- Opening a bank account
- Investing in mutual funds or stocks
- Filing income tax returns
3. Conversion of Minor Bank Account to MajorIf kids have a bank account that was opened as a minor account, it will be converted to a regular account once they reach majority age. Thus, minors can independently operate their account and make transactions.
4. Signing Contracts
Youngsters can now enter into contracts on their own without needing a parent or legal guardian's signature. This includes the following aspects:
- Signing rental agreements
- Buying a property or a car
- Applying for a loan
5. Take Over Legal ResponsibilityChildren will now be legally responsible for their debts and liabilities. This means they will have to pay back any loans or debts they have taken on their own, and they will also be liable for any legal claims made against them.
6. Filing Income Tax Returns
Minors can now file their income tax returns and pay taxes on any income they earn.
However, minors should be aware of these changes and responsibly take control of their finances. They may also consider seeking financial advice from a professional if necessary.
How to Change Minor Status to Major?
According to the Indian Majority Act, of 1875, a minor is defined as a person who is under 18 years of age. Therefore, a major is someone who is 18 years of age or older.
The process of changing a minor's status to a major typically involves these five stages:
Stage 1: Age Verification: The first step is verifying a minor's age. This can be done by submitting a copy of the minor's birth certificate or government-issued identification.
Stage 2: Guardian's Consent: A legal guardian must provide consent for the minor’s financial status to be changed to a major. This can be done by providing a letter of consent or by appearing in person to provide the consent.
Stage 3: Update Personal Information and Identification Documents: The minor’s personal information and identification documents must be updated to reflect their new status as a major, such as:
- Contact details
- PAN card
- Voter ID card
- Aadhaar card
Stage 4: Bank Accounts: Update the minors’ bank accounts to reflect their new status. This may involve opening a new account or updating the existing account to reflect the change in status.
Stage 5: Investments and Insurance Policies: Update any investments or insurance policies the minor holds to reflect the change in status.
Once the minor becomes a major, they will be legally responsible for their financial obligations, including any debt or liabilities incurred during their time as a minor. However, this process may vary depending on the specific financial institution or government body involved.
What Are the Necessary Documents for Changing the Status?
When a minor turns 18, they reach the age of majority and gain the legal capacity to enter into contracts and own assets. This requires a change in the status from minor to major. The process of changing the status from minor to major requires the submission of certain documents.
Here are the necessary documents for changing the status from minor to major:
1. Age Proof
- Birth certificate
- School passing certificate
2. Identity Proof
- PAN card
- Aadhaar card
- Voter ID card
3. Address Proof
- Aadhaar card
- Voter ID card
- Utility bills, i.e., electricity, water, gas, etc.
4. Guardian’s Documents
- Age proof
- Identity proof
- Address proof
5. Bank Account and Investment Details
- Minor’s bank account information
- Investment information of the minor account
- PAN and address proof of the minor and the guardian
Therefore, to answer ‘can minors invest in mutual funds?’ - Yes, they can, with the help of their parents or legal guardians. Parents who want to safeguard the future of their younglings should invest in mutual funds on behalf of the child. It may secure finances for goals like education, profession, marriage, etc.
Frequently Asked Questions
No, a minor cannot open a Demat account on their own. A legal guardian has to open a Demat account on behalf of the minor.
Minors can invest in any type of mutual fund, including equity, debt, and balanced funds. Furthermore, parents should opt for low-risk investments such as debt funds for minors.
The applicable income tax rate is based on the minor's investment and their parent’s higher income. However, if the income of the minor is below the tax-exempt limit, there will be no tax liability.
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