Can a Minor Invest in Mutual Funds?
18 Sep 2025 8 mins Personal Finance
Investing at a young age can set the foundation for a secure financial future. With the rising popularity of investing in mutual funds, many parents wonder if minors can partake in this investment opportunity. Understanding the rules and regulations surrounding minor investments in mutual funds is crucial for informed financial decisions. In this article, we will cover the SIP age limit, mutual fund age limit, and practical steps for parents to help their children invest wisely.
Understanding the Basics of Mutual Funds
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers and offer various benefits, including liquidity, diversification, and professional management. The mutual fund industry in India has seen significant growth, with assets under management (AUM) reaching approximately ₹39.42 trillion as of September 2023, according to the Association of Mutual Funds in India (AMFI). But can minors participate in this investment landscape?
Legal Framework for Minor Investments
In India, the legal framework governing investments by minors is defined by the Securities and Exchange Board of India (SEBI). As per SEBI regulations, a minor cannot directly invest in mutual funds. However, there are provisions that allow parents or guardians to invest on behalf of minors. This is crucial to ensure that young investors can still benefit from the potential growth offered by mutual funds.
Investing on Behalf of a Minor
Parents or legal guardians can open a mutual fund account in the name of a minor and manage the investments until the minor reaches the age of majority, which is 18 years in India. This is typically done through a guardian account. Here’s how it works:
The parent or guardian fills out the mutual fund application form, mentioning the minor's name and date of birth.
They must provide the necessary KYC (Know Your Customer) documents for both themselves and the minor. This includes identity proof, address proof, and PAN (Permanent Account Number) for the guardian.
The investments can be made through lump sum or SIP (Systematic Investment Plan) routes, with SIPs allowing for smaller, regular investments that can help in financial discipline.
SIP Age Limit and Mutual Fund Age Limit
While there is no specific SIP age limit, the investment must be made by a guardian until the minor turns 18. At that point, the minor can take control of the investments. It’s also essential to note that mutual fund companies may have individual policies, so it’s advisable to check with the respective fund house. For example, some fund houses have specific plans designed for children that mature when they reach adulthood, allowing for a seamless transition of control.
The Importance of Early Investment
Investing at a young age offers several advantages:
Compounding Benefits: The earlier a child starts investing, the more time their money has to grow through compounding. For instance, if a minor invests ₹1,000 in a mutual fund with an annual return of 12%, by the age of 18, this investment could grow to approximately ₹6,200, assuming the returns are compounded annually.
Financial Literacy: Involving children in investment decisions helps them understand the value of money and financial planning. Parents can utilize platforms like Groww or Moneycontrol to teach children how to track their investments and understand market movements.
Long-term Wealth Creation: Regular investments can lead to substantial wealth accumulation by the time they reach adulthood. For example, a monthly SIP of ₹500 from age 5 to 18, assuming an annual return of 12%, could lead to a corpus of around ₹3.5 lakh by the time they turn 18.
Choosing the Right Mutual Funds
When investing on behalf of a minor, it’s crucial to select the right mutual funds. Here are some tips:
Consider the Risk Appetite
Every mutual fund has a different risk profile. Equity mutual funds tend to be more volatile but can offer higher returns over the long run. For example, the average annual return of equity mutual funds over the last 10 years has been around 14%, while debt mutual funds have averaged about 7%. On the other hand, debt mutual funds are generally safer but provide lower returns. Assess your risk tolerance and choose accordingly, keeping in mind the investment horizon and the child’s future financial needs.
Look for Child-Specific Plans
Some mutual fund houses offer child-specific plans that are designed to meet the educational and financial needs of children. These plans typically have a longer investment horizon, making them suitable for minors. Notable examples include the HDFC Children's Gift Fund and the ICICI Prudential Child Care Fund, which are designed to help parents save for their children’s education and other future expenses.
Diversification is Key
Don’t put all your eggs in one basket. Diversifying investments across different mutual funds can help mitigate risks. Consider mixing equity and debt funds to balance potential returns and risks. A well-diversified portfolio could include 60% in equity funds and 40% in debt funds, which can provide a good balance of growth and safety.
Tax Implications for Minors
Investments made on behalf of minors come with specific tax implications:
Income generated from investments is taxed under the parent’s income, as the minor's income is clubbed with that of the parent. This means that parents should be mindful of their overall income tax bracket when investing on behalf of their children.
However, if the minor's total income exceeds ₹1,50,000 in a financial year, the minor will be liable to pay tax on the excess amount. This can be a strategic consideration for parents looking to maximize investment returns while minimizing tax liabilities.
Common Misconceptions About Minor Investments
Several misconceptions surround the topic of minors investing in mutual funds. Here are a few clarifications:
Myth: Minors Can Directly Invest
As mentioned earlier, minors cannot directly invest in mutual funds; it must be done through a guardian. This is to protect minors from making uninformed investment decisions.
Myth: All Mutual Funds Are Risky
While some mutual funds carry higher risks, there are various options tailored for conservative investors, such as debt funds. Understanding the different categories of mutual funds can help parents make informed decisions that align with their risk tolerance and investment goals.
Steps for Parents to Guide Their Children in Investing
To ensure that your child benefits from investing, consider the following actionable steps:
Educate: Teach them about the basics of investing, the stock market, and mutual funds. Utilize online resources, books, and even financial literacy programs aimed at children.
Set Goals: Help them set financial goals, whether for education, travel, or other aspirations. Goal-setting can be a powerful motivator for young investors, encouraging them to stay committed to their investments.
Involve Them: Involve them in the decision-making process to instill a sense of responsibility. Discuss potential investment options and their implications, allowing them to express their preferences and learn through participation.
Frequently Asked Questions
Can a minor directly invest in mutual funds?
No, a minor cannot directly invest in mutual funds. The investment must be made by a parent or guardian on their behalf.
What is the age limit for SIP investments?
There is no specific age limit for SIP investments; however, the account must be managed by a guardian until the minor turns 18.
Are there any tax benefits for minors investing in mutual funds?
Income from investments made on behalf of minors is clubbed with the parent's income and taxed accordingly. Parents can explore tax-saving instruments like ELSS (Equity Linked Savings Scheme) for long-term investments.
What types of mutual funds are best for minors?
Consider child-specific plans or a mix of equity and debt mutual funds based on risk tolerance and investment horizon. It's wise to consult with a financial advisor to tailor the investment strategy to the child's needs.
How can parents help their children invest wisely?
Parents can educate their children about investing, set financial goals, and involve them in the decision-making process. Encourage them to track their investments and understand market dynamics to foster a proactive investment mindset.
Key Takeaways
Minors cannot directly invest in mutual funds but can have investments managed by a parent or guardian.
The age of majority in India is 18, at which point the minor can take control of the investments.
Investing early can lead to substantial wealth creation through compounding.
Choosing the right mutual funds requires understanding risk tolerance and financial goals.
Investing in mutual funds can be a great way for minors to start their financial journey. By understanding the rules and choosing wisely, parents can set their children on a path toward financial literacy and security. If you have further questions or need assistance, feel free to reach out or consult a financial advisor.
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Author - Abhishek Sonawane
Abhishek Sonawane, an MBA graduate from the prestigious Indian Institute of Management Visakhapatnam (IIMV), brings over ten years of experience in the finance domain. His extensive background includes various roles in financial management and strategy, providing him with a comprehensive understanding of the financial landscape. Abhishek’s expertise and dedication to financial education make him an authoritative voice in personal finance, helping readers make informed financial decisions.