How to Invest in Minor Child?

Planning finances and investing in children's future is an important responsibility that every parent must undertake. While education, marriage, and other goals may seem far away when the child is young, costs can escalate rapidly in the future. Investing early can be advantageous as it allows your money to grow through the power of compounding. Are you interested in investing in your child's future financial needs in India?  

In this article, we will analyse the various investment options available for minor children in India, the tax implications, and other factors to consider before investing on behalf of your minor child.

Who is a Minor and Major in India?

As per the Indian Majority Act 1875, a minor is defined as a person who has not completed 18 years of age. An exception is in the case of a married minor girl– she attains majority at 15 years.  

On the other hand, a major is a person who has completed 18 years of age as per the law. 

Therefore, in managing investments, anyone below 18 years of age is considered a minor, and a guardian must manage investments. Parents are natural guardians, while court-appointed guardians may be required in certain specific situations.

Guidelines for Managing Minor's Investments

When investing in a minor child, the first requirement is completing KYC formalities. As per RBI guidelines, a minor of 10 years or older must have valid KYC documents, such as identity and address proof, for making investments. 

Additionally, keep these aspects in mind for managing investments of your minor child:

1. Open a separate bank account in the minor's name with either parent as the guardian. This account will be used to receive investment proceeds like dividends, interest, and redemption amounts.

2. Investment payments must only be made from the guardian's bank account.

3. Any income earned on the minor's investments is clubbed with the parent's income, whose income is higher for that year. 

4. Investments have to be held by the guardian in a fiduciary capacity on behalf of the minor.

5. All communication and transactions related to the minor's investments must clearly specify the guardian's name and the minor's.

6. When the minor turns 18, the account must be changed to a major account by providing the newly major person's PAN, KYC documents, and signature in bank records.  

Investment Options for a Minor Child

Some key investment options for accumulating funds for your minor child are discussed next:

1. Stocks

Investing in direct stocks can help create a share portfolio for your child to meet long-term goals. The key steps are:

• Open a Demat account with a stockbroker in the minor's name with you (parent) as the guardian. Submit the minor's KYC proof and birth certificate along with your identity and address documents.  
• Link the Demat account to the minor's bank account, which you have already opened.
• Invest lump sum amounts or start a systematic investment plan (SIP) to build exposure to quality stocks over time.
• As the legal guardian, you are responsible for overseeing and managing a stock investment account, keeping an eye on the collection of assets, and making decisions about buying or selling stocks on behalf of the minor.  
• When the child turns 18 years old, submit an account change request along with the major's documents to convert the Demat to a regular account managed by the erstwhile minor.

2. Mutual Funds  

Investing in mutual funds via SIPs is a disciplined way to accumulate funds for your child over the long term. Here is the process to follow:

• Complete KYC of the minor child above 10 years of age with any KRA (KYC Registration Agency).
• Open a mutual fund folio with your guardianship in the minor's name and link it to the minor's bank account.
• Start SIPs in equity funds, preferably index funds or large-cap funds, based on your risk appetite and investment time frame. 
• Manage SIPs by issuing payment instructions from your bank account as the guardian. 
• Monitor investments periodically and redeem partial/total amounts as per minor's financial needs.
• When the minor turns 18 years old, submit an account change request, along with the major's KYC and signature, to convert the mutual fund folio to a regular individual account managed directly by the former minor.

3. Bank Fixed Deposits

Bank FDs are a safe investment avenue that can help accumulate a corpus for the short-term financial needs of your minor child. Follow this process for investing in FDs for minors:  

• Open a savings account in the minor's name with parents as guardians to facilitate opening FDs. Submit KYC documents. 
• Visit your bank branch along with the minor child and documents to open a fixed deposit in the minor's name with you as the guardian. 
• Fund the FD via cheque payment from your bank account and complete documentation.
• Renew/redeem FDs as per need. Interest is credited to the minor's account. 
• Once the minor turns 18 years old, submit requests for changing the savings bank and FD account to a regular account managed by the new major directly.

4. Post Office Savings Schemes

Post office savings schemes like Sukanya Samriddhi Yojana, Public Provident Fund, Post Office MIS, National Savings Certificate, and Kisan Vikas Patra can also be considered for accumulating funds for your girl child or minor boy. 

For instance, the Sukanya Samriddhi Yojana is a good option for investing in your girl child's future needs. Follow this process:

• Open an account in any post office branch in your city with your minor girl child if she is below 10 years old.  
• If above 10 years, first complete the KYC of your girl child with documents at the post office. 
• Then, open the scheme. You can invest Rs 1,500 per annum. The account matures when she turns 21 years old.
• Manage periodic investments in the scheme via cheque payments from your account, as the scheme currently does not offer electronic payments.
• Avail partial withdrawals as per the scheme rules for her higher education/marriage expenses.

5. Real Estate

Purchasing real estate like land or an apartment in your minor child's name can build an asset and also provide rental income. Here is the process to follow:

• As the natural guardian of a minor child, you can make payments from your account and register the property in the minor name jointly with you. 
• Rental income can be credited to the minor's account. Till the age of 18 years, you, as the guardian, will handle renting out the property and maintaining records.
• At 18 years of age, the minor becomes a joint owner of the property. Handover rental proceeds management to the major child accordingly.

6. Gold

Building exposure to gold via sovereign gold bonds (SGBs), gold ETFs, digital gold, etc, can hedge against inflation and also offer stability to the overall portfolio:  

• You can apply and hold Sovereign Gold Bonds issued by RBI every 6 months in the name of your minor child with you as the guardian. 
• Alternatively, invest lump sum amounts or via SIP route into gold ETFs or digital gold from providers like SafeGold, Augmont, etc, for long-term goals.
• Manage the gold investments on behalf of minors till they age 18 years and then initiate the account change process.

7. Life Insurance

A life insurance policy helps ensure financial stability for the child in case of any eventuality to parents. Here is the process for the minor:

• You can purchase child insurance plans from leading insurance providers as a parent or grandparent. 
• Pay premiums from your account to accumulate funds that are paid out at maturity or milestones like higher education, marriage, etc.
• In case of the demise of a parent during the policy term, proceeds are paid out to the surviving parent or minor child, providing financial backup. 

8. Capital Gains Savings Bonds

If you have earned long-term capital gains on the sale of property or shares, you can invest the gains by purchasing Capital Gains Savings Bonds in the name of your minor child within 6 months of sale:

• Bonds can be purchased for a minimum of Rs 10,000 from banks and notified post offices.
• The issue amount should not exceed the capital gains amount. 
• Bonds have a lock-in period of 5 years. On redemption, proceeds are paid into the minor's bank account.
• You can manage redemption proceeds on behalf of minors till they turn 18 years old.

Changing Account Status when Minor Turns Adult

An important aspect of managing any minor's investment account is converting its status to a major account once the minor turns 18. Here is the procedure for this transition:

1. Collect KYC documents of the new adult-like PAN card, Aadhaar, mobile number verification etc. 

2. Submit a request letter to relevant entities like post office branches, stockbrokers, mutual fund houses, etc, requesting a change of account status from minor to major.

3. Append the new major person's signature, verified by the bank or guardian, in account records and KYC documents.  

4. Once the account change request is approved, it becomes a regular savings/Demat/trading account operated directly by the erstwhile minor. A new checkbook facility is also enabled.  

5. If you had opened a joint bank account with a minor child under guardianship, now you can submit a request to remove your name. The account can continue with the new major as the sole holder. 

Update nominee details and mobile banking registration details in all investments to enable direct management by the adult child when they turn 18 years old. Hand over login credentials and original documents so that they can operate investments in the future.

Conclusion

Planning early and staying invested over the long term is the key to accumulating sizeable savings for your child's future needs. Hopefully, the detailed guidelines covered in this article provide clarity on how to invest for your minor child and manage the process efficiently. Ensure you track and monitor all investments periodically so that the required corpus can be built up to achieve those long-term financial goals on behalf of your child with ease.