Financial security is one of the key goals of any parent for their child. Most parents want to build a corpus for their child before he/she becomes an adult for many reasons like higher education, marriage, health, etc. For this, parents can earmark funds as well as make focussed investments in the name of the minor. Unlike popular belief, not only government schemes but the equity-based investment can also be carried out in the name of a minor.
Let's answer some most frequently asked questions to understand how to start investing as a minor and where one can invest as a minor.
Who is a minor in India?
Any child below the age of 18 years is considered a minor in India.
Can a Demat and Trading account be opened for a minor?
Yes, both Demat and the trading account can be opened in the name of a minor child. However, the account can only be operated by a parent or a guardian till he/she reaches 18 years. A parent can open a Demat and trading account in the name of a minor, in case of the absence of both parents, a court-appointed guardian can do the same.
How can one open those accounts in the name of a minor
In order to open a Demat and trading account, the parent or guardian has to fill 2 know-your-customer (KYC) forms. One for the guardian/parent and the other for the minor.
Documents like the PAN card of the guardian/parent and the birth certificate of the minor have to be provided for the process. Also, a document proving the relationship of the guardian with the minor must be provided.
Ownership of the Demat account will lie with the minor and it cannot be a jointly held account with the parent/guardian.
The guardian can make trades on behalf of the minor. The trading account will only be used to transact while the shares will be held in the Demat account.
What happens when the minor reaches the age of 18
After the minor becomes an adult, he/she, the accounts created in the name of the minor become inoperable. He/she can close this account and open a separate account as an adult or turn the minor account into a major account.
In the first scenario, the minor will have to submit his/her PAN and fill out another KYC form. The Demat holding will then need to be transferred from the minor account to a new major account.
In the second scenario, the minor will have to enter into a new agreement with its DP and delete the guardian's name from the account details.
Are there any trading restrictions in case of a minor account?
The minor is only allowed to trade in stocks through delivery trading. Intra-day trades are not allowed through a minor trading account. Also, F&O trading in equity or currency derivatives is not allowed for a minor.
Can the minor be taxed for investments?
The interest generated by a minor's investment is added to the taxable income of his/her parents/guardian. The minor is not required to file IT returns for investments made in his/her name.
Can a minor apply for an IPO?
Yes. If the minor has a separate Demat account, he/she can apply for an IPO like any other investor.
Can a minor invest in Mutual funds?
Similar to Demat accounts, a parent/guardian can open a mutual fund folio in the name of a minor. Like demand, it also cannot be jointly held with any adult and the sole ownership remains with the minor till he/she reaches the age of 18.
In order to open a mutual fund folio in the name of a minor, proof of age of the minor and a proof of relationship with the guardian must be submitted. A KYC also has to be submitted by the guardian/parent for the same.
In the case of a SIP, the regular payments can be made via the guardian's bank account as well as through the minor's bank account.
After the minor reaches 18, he/she will have to fill out another KYC to transfer the units.
What happens in case of a change in guardian
In case of change in a minor's guardianship, the new guardian will have to submit a MAM application along with a PAN card as well as a new KYC form.
A letter of consent from the previous guardian, in case of a mutual decision or a certificate of death in case of a demise also has to be submitted. If the guardian has been appointed by the court, proof of the same also has to be submitted.
The changes also have to be made in the minor's bank account.
Where else can a minor invest
Apart from equity trading and mutual funds, investment in the name of a minor can also be made in gold bonds, PPF, real estate, FD, etc.
There are many ways to invest in the name of a minor in order to generate enough corpus for future needs. Knowing the process can make it easier for you to do the same.