- Date : 24/10/2022
- Read: 4 mins
Investing in the financial market can be done only when an individual reaches 18 years of age. Anyone below 18 years of age can invest with the help of their parents or guardian.
Interest in the financial market can begin at an early age but the minimum age to invest in the financial market is 18 years. For children looking to invest in mutual funds or for parents who want to invest in their children’s names, it is crucial to understand the benefits and drawbacks of investing in the minor’s name. Read on to understand the benefits and drawbacks of investing in a minor’s name and the procedure to invest in a minor’s name.
Investing in mutual funds in a minor’s name
With the advent of technology, individuals of all age can now study the financial market and understand about investing. All mutual fund companies allow investments to be made in the name of a minor. When an investment is being made in a minor’s name, there are two possible scenarios:
- The child is interested in investing in mutual funds.
- The parents or guardians want to invest in mutual funds in the minor’s name.
In either case, it is entirely possible and legal to do so. The investments in mutual funds will be taxable on the guardian until the minor reaches 18 years of age. Once the minor reaches 18 years, any gains on the investment will be taxed on the minor.
To invest, a mutual fund account must be opened in the name of the minor. Certain documents are essential to open the account, and the investments begin. These documents are:
- Evidence depicting the age of the minor
- Evidence depicting the relationship between the minor and the guardian
- Birth certificate of the minor or the passport of the minor
Also Read: Investing in your children's name
Benefits of Investing in a minor’s name
When an investment in mutual funds is carried out in the name of a minor, it provides various benefits:
- The investment made in the minor’s name could be a form of savings for the future. The returns from the investment can be used for the educational expenses of the child.
- The child gets interested in the investments made and can start developing knowledge of the financial market.
- Once the child reaches 18, they will be the tax bearer. The capital gains from the investment will be considered as income once the child reaches 18
- Investing in a minor’s name gives the parents or guardian an opportunity to allocate certain funds each month towards the future of their children. This would decrease the pressure on the parents in case they require money in the future.
Drawbacks of Investing in a minor’s name:
There are certain drawbacks of investing in a minor’s name which must be understood by the parents or guardian:
- Even though the child may be interested in investing in the financial market, he/she may lack the ability to comprehend the risk of losses. Allowing investments to be made in their name can lead to mental consequences if the investments result in losses.
- Once the child reaches 18 years of age, the ownership of the investments will pass on to the child. Having access to such an amount of money at 18 years of age can have unexpected consequences.
- There is no facility wherein the parents and the children can co-own the investments. Therefore, the parents would not have any control over the investments once the child reaches 18 years of age.
Making an investment in the minor’s name can be a way to safeguard the child’s future, but the parents must ensure that this does not cause a burden on the child. Until 18 years of age, every child is sensitive and might not be able to comprehend the risks associated with investments. It is crucial for the parents to understand their child’s personality, the benefits of making the investment and its drawbacks.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.