Investing in a child’s name: How mutual fund accounts for minors work, rules to know, and tax impact explained

Mutual fund investments can be made in the name of a minor (below 18 years) across all categories — equity, debt, hybrid, gold/silver and international funds — but they come with specific operational, documentation and tax rules that parents must understand before investing. Here is a clear question-and-answer explainer, as reported ET, covering how it works, what changes when the child turns 18, and the key pros and risks.Can a mutual fund investment be made in a minor’s name?Yes. A mutual fund folio can be opened in the name of a minor, but the child must be the first and sole holder. Joint holders are not permitted. The account must be operated by a guardian, who can only be the father or mother, or a court-appointed legal guardian. The guardian manages the investment only until the child attains majority.Who controls the account and for how long?The guardian has full authority to operate the folio while the child is below 18. Once the child becomes a major, all control shifts entirely to the child, and the guardian can no longer transact on the account.What documents are required to invest in a child’s name?To open the folio or make the first investment, fund houses require proof of the child’s age and relationship with the guardian. Accepted documents include the birth certificate, passport copy, or PAN of the child, which establish the date of birth and guardianship.

The guardian must be KYC-compliant. Investments can be routed through either the child’s bank account or the guardian’s bank account.Are there limits on the type of transactions allowed?No. While the child is a minor, the guardian can carry out lump-sum investments, SIPs, STPs, switches and redemptions without restriction. All standard mutual fund transactions are permitted.What happens when the child turns 18?On the date the child attains majority, all SIPs and STPs are automatically suspended, and the folio is frozen for operation by the guardian.

To resume transactions, the now-major child must submit an application to change the folio status from ‘minor’ to ‘major’, complete KYC formalities, and provide a KYC acknowledgement letter. Only then can the account be operated again.Why do parents invest in a child’s name — and what are the risks?A key benefit is discipline. Money invested in a child’s name is less likely to be diverted for other goals, helping parents stay focused on long-term objectives such as education.

The main concern is loss of control: once the child turns 18, parents have no legal say over how or when the money is used.How does taxation work before and after the child turns 18?If the investment is redeemed while the child is a minor, capital gains are clubbed with the parent’s income and taxed at the parent’s applicable rate. After the child turns 18, they are treated as a separate taxpayer. Since most 18-year-olds have little or no income, they can use the basic exemption limit of Rs 3 lakh under the new tax regime, along with their own Rs 1.25 lakh annual exemption on long-term capital gains from equity mutual funds, making post-majority withdrawals potentially tax-efficient.