How to Start Investing Early for Your Child's Future in India (2024)

Every parent dreams of securing a financially stable future for their children, ensuring they have the means to meet their educational, healthcare, marriage, and other life goals. Investing from an early age is key to achieving this goal. The trend of investing for minors in India is growing, driven by the recognition of compound interest power and the need to start early. However, navigating the rules and regulations surrounding 'minor investments' can be complex. Let's explore the ins and outs of investing for minors, including procedural requirements, investment avenues, and the transition to adulthood. Ready to dive in?

Who is a "Minor"?

In this respect, it is necessary to understand who is deemed a minor under Indian law before delving further into the investing strategies of a minor. The Indian Majority Act of 1875 states that a minor is not considered to be fully grown up until the age of eighteen.

Procedure for Starting Investment as a Minor

The fundamental matter is this - how to start investments for your minor child. It must be mentioned here that you should not begin the investment in the child's name just by opening an investment account for a minor. There are specific rules in place that need to be followed.

Here's what you need to keep in mind:

Appointing a Guardian for the Minor: Since the minor is not considered competent to make financial decisions, all such investments in the name of the minor, if made by the minor themself, should have a mentioned "Guardian" who would be caretaking the investment. In most cases, it is the parent, but sometimes, there are some extraordinary cases wherein the appointment must be through the courts.
Proof of Age: You must provide a birth certificate for your child's age.
Relationship Proof: A document proving the relationship between the guardian and the child is essential.
Requirement of KYC and Banking Information: The warden will furnish all bank details, including PAN numbers, and complete all the KYC formalities.
Payments and Receipts: The guardian should regularly make and receive all payments concerning the invested funds from or into his/her bank account.
Sole Ownership: While the guardian manages the investments, ownership solely lies with the minor child.
No Joint Accounts or Nominees: An account in the name of a minor shall not be a joint account or a nominee for an account concerning a minor.

Transitioning to Adulthood: The Road Ahead

Before properly transferring someone's investment funds, a few important steps must be taken to facilitate transitioning into adulthood. These steps are mentioned below:

Submit KYC and PAN: Upon turning 18, your child's PAN and KYC documents must be submitted.
Updation in Signatures: Replacing the guardian's signature with a bank declaration is now mandatory for your child's investment account.
Operating Account: Please note that the child is now allowed to handle cash transactions for the investment on your behalf.
Closure of the minor account: If the account is opened in the name of the minor, it will not be operated when the minor attains majority; a new account may have to be opened.

Can a Minor Invest in Stocks in India?

Yes, minors can invest in the stock market, but with a catch – a guardian must operate the Demat accounts, trading accounts, and bank accounts. Here are some key points to consider:

PAN Submission: The PAN card of the minor and the guardians has to be submitted, duly attested, to open the trading accounts and the minor's Demat.
Trading Limitation: For trading in the minor trading account, the minor investor can only make a stock market investment by trading in equity delivery trades. Moreover, they are prohibited from intraday equity trading, currency derivatives trading, or equity derivative trading (F&O).
Transition to Adult Life: An account opened by or on behalf of a minor may be operated as a demat account and continued to be maintained in the name of the minor until the minor turns eighteen. In this case, the new bank or branch must meet all other requirements, such as getting proof of identity and address and letting the account's operation state change from MSA(Multi Savings Account)to CA(Current Account).
Keeping Paper Shares: In the case of shares kept with any minor's account, he/she has to be at the time of opening the account. Shares have to be transferred in the name of the minor and, after that, into his/her demat account.
3-in-1 Account: You can open a 3-in-1 Account (Bank + Trading + Demat Account) in the name of a minor.

Can Minors Invest in Mutual Funds?

When a guardian assists, minors may make mutual fund investments. While investing in mutual funds on an account requires being at least eighteen, there is no upper age limit.

To invest in mutual funds as a minor, keep the following points in mind:

Documents Required: Birth certificate, mark sheet, leaving certificate from the respective state board (HSC, ICSE, CBSE, etc.), minor's passport, or date of birth proof.
Guardian Modification: If there's a change in the minor's guardian due to a mutual parental decision or the current guardian's demise, you'll need to submit additional documents as per AMFI regulations, including a form for guardian modification, KYC and PAN of the newly appointed guardian, a consent letter from the existing guardian (if applicable), and a death certificate (if applicable).
Registering New Guardian: The name and signature of the newly appointed guardian must be registered with the minor's bank account.
Transitioning to Adulthood: When the minor turns 18, they need to apply for a change in status using the MAM form and specified documents. Before submitting the form, they must obtain a PAN, satisfy KYC requirements, change their bank account status or open a new account, and provide a fresh SIP, STP, or SWP mandate, if applicable. The account will be frozen until this process is completed.

Other Avenues for Minor Investments

While stocks and mutual funds are popular choices, there are several other avenues where you can invest in your child's name:

Gold: An SGB application can be approved by a guardian on behalf of a minor. In such a case, copies of the PAN and the application form will be submitted to the guardian. You may also invest on behalf of your minor in digital gold with GoldRush on its platform or open a metal account with Stock Holding Corporation of India Ltd.
Real Estate: A parent shall enter into a contract with another adult in purchasing any property. The title and all related documents concerning the property shall indicate that the parent executed the contract solely as a natural or legal guardian for and on behalf of their minor.
Public Provident Fund (PPF): A guardian can open a PPF account in his child's name. It comes with an investment ceiling of INR 1.5 lakhs per annum both to the guardian and on behalf of minors. Later, upon attaining the age of 18 years, your child can apply to convert the account status from minor to major. Declaration by the Guardian is needed in case of any withdrawal from the minor's PPF Account.
Sukanya Samriddhi Account: Under the Sukanya Samriddhi Yojana savings scheme, two accounts for two girl children can be in the parents' names. A legal guardian can open the account when parents pass away. The beneficiary, i.e., the girl child, receives the matured scheme at the time when the scheme matures. At the same time, the account draws maturity when the holder has attained the age of 21, but at the same time, the account balance up to a maximum of 50% can be withdrawn for carrying out her higher education.

Key Takeaways

As we wrap up this comprehensive guide, let's recap the key points:

A minor is an individual who has not attained the age of 18 years, as per the Indian Majority Act of 1875.
Minors cannot invest in India on their account but through a natural guardian (parent) or a court-appointed guardian.
Upon attaining the majority, the minor's bank account must be changed and have a chequebook requiring their signature.
Minors can invest in stocks and mutual funds in India, but the guardian will operate the accounts.
Other avenues that allow investment in the name of a minor include Sovereign Gold Bonds, digital gold, PPF, and the Sukanya Sammriddhi Account.