Many parents and guardians look to mutual funds to build long-term wealth for a child’s future needs such as education, business capital, or financial security. Direct mutual fund plans, in particular, are often preferred due to their lower expense ratios and better long-term efficiency.
From a compliance and operational perspective, investing for a minor is straightforward, provided the account is structured correctly and documentation is kept in order. This note explains who can invest, how a minor folio is opened, what documents are required, and what changes when the child becomes a major.
Why consider direct mutual funds for a child
Direct mutual fund plans have:
- Lower expense ratios compared to regular plans
- No distributor commissions embedded in costs
- Higher compounding efficiency over long holding periods
For investments intended to run for 10–15 years or more, even small cost differences can materially affect outcomes. This makes direct plans particularly suitable for long-term goals linked to children.
Who can invest on behalf of a minor
Only the following can operate a minor’s mutual fund account:
- A parent, or
- A court-appointed legal guardian
Key point:
- The minor must be the sole holder of the folio
- Joint holding is not permitted
- The parent or guardian acts only as an operator, not as a co-owner
The investment legally belongs to the child from the start.
KYC requirements for the guardian
Before any investment can be made:
- The parent or guardian must complete full KYC
- PAN, identity proof, address proof and verification are mandatory
Without completed KYC:
- A minor folio cannot be opened
- Transactions will not be permitted
This is a regulatory requirement under SEBI norms and applies irrespective of investment size.
Opening a minor mutual fund folio
The folio is opened:
- In the child’s name
- With the guardian registered as the operator
This can be done:
- Directly on the AMC’s website, or
- Through authorised direct investment platforms
Only direct plans should be selected if the objective is cost efficiency.
Documents required
The following documents are typically required:
- Child’s birth certificate or passport (proof of age)
- Proof of relationship between guardian and child
- Guardian’s PAN and KYC documents
- Bank account details linked to the minor or guardian, as permitted
- Cancelled cheque or bank proof for redemption credit
Keeping these documents organised helps avoid delays in future redemptions or changes.
Choosing suitable funds
There is no regulatory requirement to invest only in “children’s funds”.
In practice:
- Fund selection should be based on time horizon and risk capacity
- For goals more than 10 years away, equity-oriented funds are commonly used
- Asset allocation should be reviewed periodically as the goal approaches
The focus should be on portfolio suitability, not product labels.
Investing and monitoring
You may invest:
- Through a lump sum
- Through a Systematic Investment Plan (SIP)
SIPs are often preferred as they:
- Build investment discipline
- Smooth market timing risk
Periodic review is advisable, but frequent switching should be avoided unless the underlying objective or risk profile changes.
What happens when the child turns 18
Once the child attains majority:
- The minor folio is frozen for transactions
- The child must complete KYC in their own name
- PAN, bank details and signature must be updated
Only after this process:
- Control of the investments fully shifts to the child
- The guardian’s authority automatically ceases
Advance planning helps ensure a smooth transition without operational disruption.
Points to be mindful of
- Income from investments in a minor’s name may be subject to clubbing provisions under the Income Tax Act, subject to exemptions
- Capital gains taxation applies as per prevailing rules
- Documentation consistency is critical to avoid future disputes or delays
Closing note
Investing in direct mutual funds for a child is not complex, but it is process-sensitive. Correct folio structure, complete documentation, and clarity on ownership are essential from day one. When done properly, this approach allows parents to combine regulatory compliance, tax efficiency, and long-term financial planning in a clean and transparent manner.