How to invest in mutual funds online for minors

Investing for your kids is an important financial goal. It is like planting seeds for a huge tree—you nurture it today, and it provides shade for your children when they grow up. It’s not just about setting aside money; it’s about securing their future.

Imagine the relief of having their education or wedding expenses covered, all because you took a few simple steps today. Plus, it gives you the peace of mind that comes with knowing you're securing their tomorrow.

Investing early for your children’s goals can ensure that their future needs are met. Many families who have shared their financial planning stories withMinthave mentioned how they benefit from investing early for their children.

Can a minor invest in mutual funds?

Anyone under the age of 18 (a minor) can invest in mutual funds with the help of a parent or legal guardian. The minor must be the sole account holder, but since a minor is not allowed to make financial decisions on their own, a parent or guardian can act as the custodian of the minor’s account.

Also, joint holding is not allowed in a minor’s mutual fund folio. The guardian in the mutual fund folio on behalf of the minor must either be a natural guardian (i.e., a parent) or a court-appointed legal guardian.

What are the documents required?

The required documents include proof of relationship with the minor, such as the minor’s birth certificate. Additionally, valid bank proof is required, which can be provided through a cancelled cheque, a bank passbook or a bank statement with entries not older than 90 days.

Make sure that you have these documents handy before getting started with the online process.

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For transactions in a minor’s mutual fund account, the accepted bank accounts include the minor’s own bank account, a joint account of the minor with a parent or legal guardian, and the parent or legal guardian’s bank account.

For adding funds, the money can come from any of these accounts, provided they are registered in the minor’s folio. For withdrawing funds, the money will be paid out to the minor’s registered bank account or a joint account with the guardian that is registered in the folio. (See graphic).

How to get started?

A guardian can invest on behalf of the minor either offline or online. The offline process involves a guardian visiting a nearby asset management company or a registrar and transfer agent (AMC/RTA) with all the required documents. After getting your documents verified physically and filling the required forms, you can get started with the investments in a few days. AMCs and RTAs do not have an online facility yet.

However, MF Utilities, an initiative of the mutual funds industry, allows you to carry out the entire process online. You need to visitwww.mfuindia.com. Make sure that you have the required documents handy before getting started with the online process.

The first step is to create a CAN (Common Account Number). It is an industry level folio allotted by MF Utilities to investors, which means you can invest in funds across all fund houses. To create a CAN, select ‘Open CAN Instantly’ under the ‘For Investors’ tab on the menu. Now fill in the applicable email or mobile number and click on the ‘New form’ option. A new tab, ‘eCAN Registration’ will open. This tab involves five steps to create a minor’s mutual fund account.

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The first step is to complete the CAN criteria section by filling the required details. Select the choice of CAN registration as ‘Completely electronic’, the holding nature as ‘single’, the investor category as ‘minor’, select the applicable tax status, and click ‘next’.

The second step is to fill in the basic details of the minor, such as name and date of birth.

The third step involves filling in the guardian’s details, with additional customer verification, or know-your-customer (KYC), information.

In the fourth step, you enter the default bank account details for transactions. You can add up to three bank accounts.

In the final step, you have to upload the required documents as mentioned earlier, click on ‘agree to the eCAN terms’, and submit your eCAN application.

Once the backend team at MF Utilities verifies your documents, you will receive an email acknowledgement within a few hours that your CAN has been generated. You then have to create your login credentials on the MF Utilities website and sign in, after which you can start your investment journey for your minor.

What should you do when the child turns 18?

When your child attains the age of 18 and becomes a major, the first thing you need to do as a parent or guardian is update the account status from minor to major. There is a well-defined process to execute this.

When the child becomes a major, they will need to have a PAN card and must be KYC-compliant. If this change is not made, all transactions in the account will be halted. To update the status, you will need to submit a request to the respective AMC/RTA, providing the necessary documents such as the child’s proof of age and a new KYC form.

Once the status is updated, the account will continue to function normally, with the child now being an adult will be able to manage their investments independently.

Tax implications

Until the child reaches adulthood, all income and gains from the child’s portfolio are clubbed with the parent’s income, and the parent is responsible for paying the applicable taxes. The year the child turns 18, they will be treated as a separate entity and will be responsible for paying taxes for the months during which they are a legal adult in that year.

Challenges with minor investing

Since minor folios cannot have a nominee, this can present several challenges, especially in the event of the guardian’s death or disagreement between the parents. What is the solution for this? Change of guardian, although the process to transfer the investments can become complicated and time-consuming.

When there is a change of guardian for a minor unitholder, several documents are required to update the records. You will need to submit an application for changing in guardian in a prescribed form. Along with this, you will need to include a copy of the new guardian’s PAN card, KYC acknowledgement and a cancelled cheque showing the new guardian’s name on the minor’s registered bank account.

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If the change is due to disagreements between parents, a consent letter from the existing guardian is needed. If the guardian has passed away, provide a copy of the death certificate, and an authorized AMC employee will verify the original documents, after which the new guardian details will be updated in the minor’s folio.

The new guardian must be a natural guardian (father or mother) or a court-appointed legal guardian. The new guardian’s name and signature must be registered with the minor’s bank account.

The application form for change of guardian should indicate whether the guardian is a father, mother or legal guardian, along with documents proving the relationship with the minor. For a court-appointed legal guardian, a copy of the court order is required.

Another challenge is when the minor turns 18, they might not be mature enough to manage the money. Since joint holding isn’t allowed in a minor’s folio, control of the investments transfers solely to the child at adulthood, which can lead to financial mismanagement if they’re not prepared. It’s crucial to educate them about financial responsibility beforehand.