Children’s Day: All your questions answered on investing for a minor

As we observe Children’s Day today, many parents continue to be concerned about their children’s financials. Ensuring financial security is a paramount objective for parents. They aim to guarantee that their children possess the necessary financial means to fulfill basic requirements like food, shelter, clothing, and healthcare, while also supporting their pursuit of goals and aspirations.

Investing for a minor is not easy, especially, when investors are not sure of where and how to commence the investment journey on behalf of their wards. Many people inquire about putting money on their children’s behalf to ensure that lack of money does not impede their life goals. 

Can a minor have a Demat account?

A minor is eligible to possess a Demat account, but its operation must be overseen by a guardian until the minor attains the age of majority. This restriction arises from the fact that minors lack the legal capacity to engage in binding contracts, which includes the processes necessary for opening and managing brokerage accounts.

To establish a Demat account for a minor, the guardian is required to furnish the broker with the minor's birth certificate and proof of guardianship. Furthermore, the guardian must sign all essential documents on behalf of the minor.

Following the successful setup of the Demat account, the guardian can utilise it for the buying and selling of securities on behalf of the minor. Additionally, the Demat account can be employed to receive dividends and other payments on behalf of the minor.

Upon reaching the age of majority, the minor gains control of their Demat account. Nevertheless, they may opt to retain the guardian as the account operator, particularly if they are new to the realm of investing.

What are the main documents needed to invest in your minor’s name?

The essential documents needed for making investments in the name of a minor include:

• Proof of age: Acceptable documents for this purpose include a birth certificate, passport, or school leaving certificate.
• Proof of relationship: Valid documents demonstrating the relationship can include a birth certificate, marriage certificate, or a court order designating the guardian.

In addition to these primary documents, the guardian may be required to furnish additional documents such as their PAN card and bank account statement. The following examples illustrate how these documents can be utilised to establish the relationship between the minor and the guardian:

• Birth Certificate: A birth certificate indicating the minor as the biological child of the guardian.
• Marriage Certificate: A marriage certificate confirming the guardian as the parent of the minor.
• Court Order: A court order designating the guardian as the legal guardian of the minor.

It is imperative to acknowledge that the specific prerequisites may vary based on the investment product and the policies of the financial institution. It is advisable to verify with the financial institution prior to initiating an account for a minor.

How do you start investing on behalf of a minor?

An individual below the age of majority is not permitted to independently make investments. All investments on behalf of minors must be conducted by a guardian. The guardian assumes the responsibility of overseeing the minor’s investments and making decisions in the minor’s best interests.

Typically, parents serve as the natural guardians of their underage children. However, there are instances, such as the demise or incapacitation of parents, where a court-appointed guardian may become necessary.

To initiate an investment account for a minor, the guardian must furnish specific documents, including the minor’s birth certificate and evidence of guardianship. Additionally, the guardian must select the type of investment account and specify the investment products of interest.

Upon opening the account, the guardian assumes the responsibility of overseeing and making investment decisions. Regular monitoring of the account is essential, ensuring that the investments align with expectations and perform as anticipated.

How to decide investments for minors?

It’s crucial to emphasise that the guardian holds a fiduciary duty to the minor, necessitating actions in the minor’s best interests and avoiding decisions that might jeopardise their financial well-being. Here are some recommendations for guardians overseeing investments for minors:

• Select appropriate investment products: Consider the minor’s age, risk tolerance, and investment objectives when choosing products.
• Diversify the portfolio: Avoid concentration risk by investing in various asset classes, including stocks, bonds, and cash.
• Regularly rebalance the portfolio: Adjust the investment mix as the minor matures and their needs evolve.
• Utilise tax-advantaged accounts: Explore tax-advantaged accounts tailored for saving and investing on behalf of minors.
• Consult with a financial advisor: Engage a financial advisor to craft an investment plan aligned with the minor’s circumstances and goals.

Can you invest in stocks on behalf of your minors?

While minors can participate in the stock market, a guardian must manage their Demat accounts, trading accounts, and bank accounts. This is due to the legal incapacity of minors to engage in binding contracts necessary for the establishment and operation of brokerage and bank accounts.

To initiate a Demat account for a minor, the guardian is required to furnish the broker with the minor’s birth certificate and proof of guardianship. Additionally, the guardian must sign all pertinent documents on behalf of the minor.

Upon successful establishment of the Demat account, the guardian can utilise it to engage in stock transactions on behalf of the minor. Simultaneously, a trading account needs to be opened for the minor to facilitate the placement of buy and sell orders, with the trading account being linked to the minor’s Demat account.

Furthermore, a bank account must be opened for the minor to enable the deposit and withdrawal of funds from their trading accounts. The bank accounts will be interconnected with the minor’s Demat account.

Can you invest in mutual funds on behalf of your minor?

Parents have the option to initiate a Systematic Investment Plan (SIP) for their underage children. SIP involves investing a fixed amount of money at regular intervals, such as monthly, quarterly, or yearly, into a mutual fund scheme. SIPs offer an excellent avenue for long-term savings and investments, leveraging the advantages of rupee cost averaging.

To commence an SIP for a minor, the parent must establish a Demat account and trading account in the minor’s name. Once these accounts are operational, the parent can commence investing in a selected mutual fund scheme. They have the flexibility to choose a SIP amount that aligns with their budget and is affordable.

For parents contemplating the initiation of an SIP for their minor children, here are some valuable tips:

• Choose an apt mutual fund scheme: Factor in your child’s age, risk tolerance, and investment objectives when selecting a mutual fund scheme.
• Initiate early: The sooner you commence investing, the greater the time available for your money to grow.
• Be consistent: Even if the monthly investment is modest, consistent contributions accumulate over time.
• Step up your SIPs: As your income rises, consider incrementally increasing your SIP amount. This accelerates progress toward your financial objectives.
• Avoid panic selling: Despite market volatility, refrain from panic selling. SIPs mitigate the impact of short-term fluctuations, allowing you to navigate market dynamics with composure.

Can you buy gold bonds on behalf of your minor?

A minor has the opportunity to invest in a Sovereign Gold Bond (SGB) through their appointed guardian. The application for SGB must be submitted by the guardian, accompanied by a copy of their PAN.

To facilitate investments in SGBs for a minor, the guardian must initiate the opening of a Demat account and trading account in the minor’s name. Subsequently, after the successful establishment of these accounts, the guardian can proceed to apply for SGBs through their preferred bank or broker.

When submitting an application for Sovereign Gold Bonds on behalf of a minor, the guardian is required to furnish the following details:

• Minor’s name
• Minor’s date of birth
• Minor’s PAN (optional)
• Minor’s address
• Guardian’s name
• Guardian’s PAN
• Guardian’s address

The guardian is also obligated to sign the SGB application form on behalf of the minor. Upon submission of the SGB application, the guardian will receive confirmation from the chosen bank or broker. Subsequently, the SGBs will be credited to the minor's Demat account. The guardian assumes responsibility for overseeing the minor's SGB investment, encompassing tasks such as redeeming the SGBs upon maturity and receiving the proceeds on behalf of the minor.