Minor as MF investor

A minor as a mutual fund investor is a person below 18 years of age who invests in units of SEBI-registered mutual fund schemes through a natural or legally appointed guardian. Minors cannot execute legal contracts in their own name under the Indian Contract Act, 1872 (a contract with a minor is void ab initio); therefore, all investment transactions in a minor’s folio are executed by the guardian on behalf of the minor. The folio is in the minor’s name, with the guardian as the operating authority until the minor attains majority.

Legal framework

Section 11 of the Indian Contract Act, 1872 declares that a person is not competent to contract if he or she is a minor. A minor’s agreement is void, not merely voidable. This creates the need for a guardian structure in mutual fund folios.

The Guardians and Wards Act, 1890, and the Hindu Minority and Guardianship Act, 1956 (for Hindu families), govern the types of guardians recognised by Indian law. SEBI and AMFI have prescribed specific guardian categories for mutual fund investment.

Eligible guardians

AMFI and the SEBI (Mutual Funds) Regulations, 1996, accept the following guardian types for a minor’s folio:

1. Natural guardian, father for a legitimate child; mother if the father is deceased or otherwise incapacitated. For an illegitimate child, the mother is the natural guardian. Natural guardian status does not require a court certificate.

2. Legal guardian, appointed by a court under the Guardians and Wards Act, 1890. Required where the natural guardian is unavailable, disqualified, or where a third party (grandparent, uncle/aunt) is the guardian. A copy of the court order appointing the legal guardian must be submitted.

3. De facto guardian, a person who acts as guardian without formal appointment. De facto guardians are generally not accepted by AMCs for mutual fund folios; they require formal documentation (court order or notarised guardianship deed).

Under SEBI Circular No. SEBI/HO/IMD/IMD-I DF4/P/CIR/2021/648, the AMC must maintain on record the guardian’s relationship with the minor and the type of guardianship.

Folio structure and restrictions

• The folio is opened in the minor’s name as the first holder; the guardian’s name appears alongside but does not constitute a “joint holder” in the conventional sense.
• Only sole holding is permitted, a minor cannot be a joint holder with another person. If an adult wishes to invest jointly with a minor, the minor must be the sole holder with the guardian as operating authority.
• Nominee designation, SEBI Circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/181 requires nomination or opt-out for all folios; a minor’s folio must have a registered nominee (typically the guardian) or carry an opt-out declaration.
• SIP mandates, SIPs can be set up in a minor’s folio. The NACH mandate is executed by the guardian using the guardian’s bank account. Some AMCs require that SIPs be structured to automatically stop before the minor’s 18th birthday; in any event, the AMC must be notified when the minor attains majority.

KYC documentation

Minor’s KYC:

Guardian’s KYC:

The guardian’s KYC is linked to the minor’s folio and is validated independently of any KYC the guardian may have for their own folios.

FATCA/CRS self-certification is filed by the guardian on behalf of the minor, identifying the minor as the account holder and the guardian as the controlling person.

Attaining majority, the re-KYC process

When the minor attains 18 years of age, a mandatory process is triggered:

1. AMC notification, the AMC/RTA sends an advance notice to the registered address and email when the minor is approaching the 18th birthday.
2. Fresh KYC, the now-adult investor must complete a fresh KYC (or update the existing KYC from “minor” to “major” status) with a current identity proof and address proof in his or her own name.
3. New bank account, the folio bank mandate must be updated to the adult investor’s own bank account (the guardian’s account cannot be used for redemptions after the minor attains majority).
4. New signature, the adult investor’s own signature must be registered.
5. Nominee update, the existing nominee (often the guardian) may need to be updated.

SEBI Circular No. SEBI/HO/IMD/IMD-I DF4/P/CIR/2021/648 mandates that all fresh transactions (purchases, redemptions, switches) in the folio be suspended after the minor attains majority until the re-KYC process is complete. SIP instalments also stop automatically once the minor turns 18, unless the re-KYC is completed.

Taxation

Minor’s income clubbing

Under Section 64(1A) of the Income Tax Act, 1961, income arising to a minor from a mutual fund investment is clubbed with the income of the parent (whichever parent’s income is higher) if the minor is unmarried and a minor at the time the income arises. However:

• If the minor has earned the income through manual work or activity involving skill, talent, or specialised knowledge, it is not clubbed.
• After clubbing, the parent is entitled to an exemption of Rs 1,500 per minor child per year under Section 10(32).

Capital gains on mutual fund redemptions by a minor are clubbed with the parent’s income and taxed at the parent’s applicable rate.

Tax return

The minor’s income (after clubbing) is reported in the parent’s income tax return. There is no need for the minor to file a separate return unless the minor has independent income exceeding the basic exemption limit that is not clubbed with parents.

SGB and ELSS

Minors may invest in ELSS schemes. The Section 80C deduction accrues to the parent since the minor’s income is clubbed. The deduction is capped at Rs 1,50,000 across all Section 80C investments in the parent’s return.

Investing for a minor, practical considerations

Choosing the right scheme

Parents and guardians investing for a minor’s future (education, marriage, first home) should consider:

• Equity schemes, suitable for a horizon of 10 years or more; high growth potential with short-term volatility that a long horizon can absorb.
• Solution-oriented children’s funds, hybrid schemes with a five-year lock-in or lock-in until the child turns 18, whichever is earlier; the lock-in enforces savings discipline.
• ELSS, three-year lock-in; provides Section 80C benefit to the parent through the clubbing provisions; not ideal as the primary vehicle since the lock-in is short relative to the investment horizon.

Nomination and succession

A minor’s folio should have the guardian registered as the nominee, to ensure seamless transmission to the guardian should the minor predecease the guardian. If the guardian predeceases the minor before the re-KYC is complete, a new legal guardian must be appointed through a court order before the folio can be transacted.

Banking, minor’s bank account

Some guardians prefer to open a minor’s bank account (most banks offer savings accounts for minors) and link that account to the mutual fund folio, rather than the guardian’s personal account. This separates the minor’s corpus from the guardian’s personal finances and facilitates cleaner accounting. Upon attaining majority, the minor’s bank account is converted to a regular savings account, and the mutual fund folio bank mandate is updated in a single exercise.

Special situations

NRI guardian investing for a minor

An NRI guardian may invest in Indian mutual funds on behalf of an Indian-resident minor. The investment would follow the NRI investment framework (NRE or NRO route) with the source account being the guardian’s NRE or NRO account. Redemption proceeds are credited to the guardian’s NRE/NRO account on behalf of the minor. The income is clubbed with the NRI guardian’s Indian income (if any) for tax purposes; if the NRI has no Indian income, the minor’s mutual fund income may have no Indian tax liability (subject to TDS rules applicable to NRI accounts).

Minor becoming an adult during SIP

When a minor investor turns 18 mid-SIP, the AMC freezes the SIP on the 18th birthday date. The SIP does not automatically continue until re-KYC is completed. To avoid an interruption in SIP contributions, the guardian should initiate the re-KYC process at least 45–60 days before the minor’s 18th birthday so that the new KYC, bank mandate update, and signature registration are completed before the automatic freeze.

Regulatory framework

• Indian Contract Act, 1872, Section 11, minor’s incapacity to contract
• Guardians and Wards Act, 1890, legal guardian appointment
• Hindu Minority and Guardianship Act, 1956
• SEBI (Mutual Funds) Regulations, 1996, minor as eligible investor
• SEBI Circular No. SEBI/HO/IMD/IMD-I DF4/P/CIR/2021/648, minor’s folio and re-KYC
• Income Tax Act, 1961, Sections 10(32), 64(1A), minor’s income clubbing

See also

• Resident individual MF investor
• Joint holders in MF folio
• HUF as MF investor
• Mutual fund
• SEBI

References

1. SEBI Circular No. SEBI/HO/IMD/IMD-I DF4/P/CIR/2021/648, minor investors in mutual funds.
2. Indian Contract Act, 1872, Section 11, competency to contract.
3. Income Tax Act, 1961, Sections 10(32), 64(1A), minor’s income treatment.
4. Guardians and Wards Act, 1890, court-appointed guardianship.
5. Hindu Minority and Guardianship Act, 1956, natural guardian hierarchy.
6. AMFI guidelines on guardian types for minor folios.