Mutual Funds

MF holdings in a minor’s name

BL Research Bureau | Updated on October 16, 2021

You can either carve out a part of your MF portfolio or invest in the child’s name

Parents like to have investment goals linked to their child’s education, wedding or other future needs. When investing in mutual funds for this purpose, you can either carve out a part of your portfolio and allocate it to their needs, or you could make investments directly in your child’s name.

If you plan to make investments in mutual funds in the name of your minor children, here are a few things you should know.

Account holding

When you create a corpus for your minor child and invest in his/her name, you cannot be a joint account holder. Your minor child must be the sole account holder of the mutual fund folio. The child will essentially be the beneficiary of these investments.

The parent making the investment in the mutual fund folio has to act as a guardian. To complete this formality, most fund houses will ask you to fill a third-party declaration form and complete the know-your-customer (KYC) formalities (about the parent).

Then you can proceed with the normal formalities for investing in mutual funds. In case the minor has his/her own source of income, the KYC process will have to be completed for the minor as well.

If you want to change the guardian of your child in the mutual fund records, you will have to fill another form with the consent of the existing guardian. KYC formalities will have to be completed for the new guardian.

If the change is necessitated by the death of a parent who had acted as a guardian, a copy of the death certificate must be provided with the form.

Attaining majority

On attaining majority, your child has to update his/her status to a major by giving a declaration to the mutual fund house. SEBI has made this declaration mandatory.

An updated KYC of your child, submitting documents such as birth certificate, copy of PAN card, Aadhaar card, address proof and bank details will be required.

In the absence of such a declaration, any future transactions in the name of your child will not be processed by the fund house.

Fresh investments or redemptions from such folios will automatically stop when the child turns 18.

Tax aspect

Any income generated in the hands of the minor will be taxed in the hands of the parent who has a higher total income under income-tax laws. If the parent who is the guardian in the records of the mutual fund has a lower income than the other parent, the income will be clubbed with that of the parent who has a higher income.

Once the minor reaches the age of majority (18 years), the income from the mutual funds will be taxable in his/her hands.

Published on October 16, 2021

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