What are the advantages and disadvantages of investing in mutual funds in the name of a minor?
- Amlan Basak
The advantage of investing in the name of a minor is that you are able to ring-fence a certain allocation from your other investments and this could be used for a critical goal like the higher education of a child. So you are able to create a very distinct allocation by investing in the name of a minor.
Now, the other important aspect to remember is that the ownership of these investments passes on to the child once he/she attains the age of majority. And once the child attains the age of majority, the account is frozen for some documentation to pass on the ownership in terms of the rights to make investments or redemptions from this account to the child. Some people see it as a disadvantage because they believe that the ownership passes on to the child at an age where he/she may not be mature enough. That's an important point for you to consider.
Another important aspect is the capital gains treatment. Till the child is a minor, any capital gains arising out of these investments because of any sale or purchase that you make in this account, would be clubbed with your income and would be deemed as your capital gains, taxable in your hands. But once the child attains the age of majority, any income or capital gains arising from these investments would be deemed to be the income of the child. These are the considerations that you need to keep in mind.