Investing for Minors in India: A Complete Guide for MFDs

Start With the Goal, Not the Product

Investments for children typically revolve around goals such as:

• Higher education

• Overseas education

• Marriage

• Starting a business or career

• Creating a financial corpus when the child becomes an adult

The time horizon can vary dramatically.

A child who is three years old and needs money for college at 18 has a 15-year horizon. A child who is already 16 has a very different investment requirement.

This makes goal-based investing particularly important for minors.

For a long-term goal, equity exposure may have a role. As the goal approaches, however, protecting the accumulated corpus becomes increasingly important.

This is where an MFD's role goes beyond simply selecting a fund.

Whose Name Should the Investment Be In?

There are broadly three structures an MFD may encounter.

A. Investment in the Minor's Name

This is the most common structure. The minor is the owner of the investment, while the parent or legal guardian operates the account until the child becomes a major.

For mutual funds, a minor must be the sole holder. A minor cannot be a joint holder, and the guardian must be either a natural guardian (father or mother), or a court-appointed legal guardian.

This structure is useful when the family specifically wants the investment to belong to the child.

But there is an important consequence:

At 18, the child gets control of the investment. That can be perfectly appropriate for some goals, but not necessarily for all family situations.

Further, any income on investments held by the minor is clubbed in the hands of the parent for the purposes of income tax. Simply put, the income is added to the parent’s income and they have to pay tax on it.

B. Investment in the Parent's Name

The second approach is simpler operationally:

The parent owns the investment and earmarks it for the child's goal.

For example, a parent may invest in a diversified mutual fund in their own name and internally designate it as “Child's Education Corpus.”

The child is the beneficiary of the goal, but does not legally own the investment merely because the parent intends to use it for the child.

This structure can provide greater control to the parent over when and how the money is ultimately used.

It can also avoid the administrative transition that occurs when a minor becomes a major.

However, the investment and its tax consequences remain those of the parent.

C. Trust Structure

For larger family estates or situations involving succession, control and multiple beneficiaries, assets may sometimes be held through a trust structure.

This is very different from simply opening a minor mutual fund account and trusts bring their own legal, tax and compliance considerations.

For most ordinary education or marriage goals, a trust is not necessary.

It becomes relevant primarily when the family has more substantial estate-planning requirements.

What Can You Invest In for a Minor?

Some of the popular options available for investing for minors are mutual funds, NPS-Vatsalya (NPS-V), Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Fixed Deposits (FD), etc.

There is no single “best child investment”. Different products solve different problems:

• SSY & PPF provide stable, fairly fixed returns. NPS Vatsalya and Mutual Funds give the option for market-linked returns

• Mutual Funds provide the highest flexibility, with no lock-ins (just short-term exit loads). Other schemes have lock-ins and withdrawal limits, which reduce flexibility but ensure discipline.

• Redemption at maturity is tax-free for government schemes; Mutual Funds attract taxes on redemption.

 The right mix for a client depends on their overall risk profile, tax status, ability to stay disciplined and the specific goals they are saving for.

Life Cycle Funds: A New Option for Goal-Based Investing

One of the more interesting developments is the introduction of the Life Cycle Fund category.

These are target-date funds designed around a specified maturity date. The portfolio follows a glide path, with the asset allocation changing as the target date approaches.

The broad idea is straightforward:

More growth-oriented assets when the goal is far away → gradually more defensive assets as the goal approaches.

For example, a Life Cycle Fund maturing in 2036 could progressively reduce equity exposure and increase debt exposure as 2036 approaches. SEBI filings for the new category demonstrate this glide-path approach.

This makes the category particularly interesting for goal-based investing.

Currently, only Zerodha AMC has launched 2 Life Cycle Funds (both are passive). Other AMCs are expected to launch.

Minor Mutual Fund Account: Rules Every MFD Must Know

Some common operational aspects to keep in mind:

• The minor is the sole holder. A minor cannot be a joint holder in a mutual fund folio.

• The guardian operates the investment on the minor's behalf. For mutual fund purposes, the guardian is generally mother, father or a court-appointed legal guardian. A grandparent cannot simply become the guardian because they are funding the investment - a court-appointed legal guardianship may be required.

• The money to fund mutual funds can come from the minor’s bank account, parent/legal guardian’s bank account or a joint account of minor and guardian.

• Redemption proceeds from a minor's folio are required to go to the verified bank account of the minor, subject to the applicable KYC and banking requirements. This is an area where MFDs should avoid assuming that the account used to make the original investment will automatically be the account into which redemption can be paid.

One of the most important things an MFD can do is prepare the family well before the child turns 18.

The investment does not simply continue operating as before.

Once the minor attains majority:

• The guardian can no longer operate the folio.

• The folio is frozen for customer-initiated transactions.

• The new major must complete the prescribed KYC formalities.

• PAN and bank details need to be updated.

• A new/updated bank account and signature formalities are required.

• SIP/STP/SWP instructions do not simply continue beyond majority without the required changes.

AMFI specifically states that no further transactions are permitted until the status is changed from minor to major.

A Simple Framework for MFDs

GOAL → HORIZON → OWNERSHIP → ASSET ALLOCATION → PRODUCT → TAX → REVIEW

The product is only one part of the decision.

For a child's financial future, the right structure can be just as important as the right investment.