The needs of dependent children is one of the primary financial goals that most people save and invest for during their earning years. This includes saving for their education, career, marriage and other financial needs. Knowing how to make and manage these investments efficiently will go a long way in getting to the goals.
Holding the investment
Investments for minors can be made and managed in two ways. One way is to hold these investments in your name and once the corpus is built, assign the funds to meet the different goals, including those related to children. The other way is to hold the investment in the child’s name itself. Investments that are held in the name of your children, who have not yet attained the age of 18 years, are called minor investments. You can choose to hold the investments either way though there are some differences in the procedures involved and how they are managed.
Most investments, including bank deposits, Public Provident Fund, equity and debt securities held in demat accounts, and mutual fund investments, can be held in the name of a minor investor for whose benefit it is intended. It has the advantage of the investment made being aligned to the needs of the goal. Investments targeted at minor investors may also have lock-in periods and fees for early withdrawal, which force the discipline to continue investing. However, there are greater formalities involved in making investments in the name of minors.
On the other hand, investing for the child but holding the investment in the name of the parent is a simpler option. The child could be a nominee or joint holder so that it is clear that the particular investment is earmarked for that child. This option gives you greater flexibility and control over the investment. Once minor children become major, the management of the investment passes into their hands and the parents have little control on how the funds will be used.
A guardian to guard
Investments held in the name of minors have prescribed operational procedures, primarily from the view of protecting their interests. All minor investments must have a person identified as the guardian, who will make and manage the investments on behalf of the child. Parents are the natural guardians of children. In the absence of parents, the courts can appoint a legal guardian. The guardian appointed to an investment account may be changed by following the procedures prescribed for the same. The new guardian will now have to comply with the KYC requirements and have a PAN card.
Paperwork involved
Minor investments are identified by the date of birth of the investor. This information is provided in the form at the time of making the investment and it is mandatory to provide proofs of age. These can include birth certificate, school-leaving certificate and passport. It is not necessary for the minor investor to be KYC compliant, have a PAN card or have a bank account to be eligible to invest. These formalities have to be completed by the guardians, in case of minor investments, as if they are the investor. As a minor’s investment account will be operated by the guardian, documentary proof establishing the relationship of the guardian with the minor, or the court order in case of a legal guardian, should be provided at the time of investing.
Managing minor investments
The bank account through which the payments for the investment will be made, and the credits received, can either be in the name of the guardian or in the name of the minor under guardianship. If the payment is routed through the minor investor’s bank account under guardianship, then a declaration from the bank manager may be required to certify the details of ownership of the bank account. Irrespective of the source of payment, the ownership of the investments will lie with the minor investor.
An investment in minor’s name can only be held as a sole applicant. There cannot be a joint holder and the mode of operation is single. The investment account cannot have a nomination.
When minor becomes major
Once a minor attains majority status, the investor has to apply for a change of status in the investment. All the investment formalities such as PAN and KYC will now have to be complied with by the till-now minor investor. Her signature, attested by the bank manager, will replace that of the guardian in the investment records, and the new bank account details have to be provided for all future credits and debits related to the investment. Typically, an investment made in the name of a minor cannot be operated by the guardian once the minor becomes a major. Facilities such as standing instructions in bank accounts, systematic investment and redemption plans and others will be registered only till the date when the minor investor attains majority.
Even if the investment is held in a minor child’s name, clubbing provisions will mean that any income will be liable to payment of tax by the parent. Consider all the aspects such as control, complexity and the taxes relating to these investments before deciding how you want to manage the process of building up a corpus for your minor children.
