Recently a client’s son bought a Kawasaki Ninja ZX at ₹ 15 lakhs (Pune registration) – one of the most sought-after Superbikes, with elegant design, Ninja styling, hot looks, lots of safety measures and everything an eighteen to twenty-year-old, bike-enthusiastic dreams of. As Parsis, when we buy a new vehicle, we normally initiate it with sagan – flowers and coconut; some distribute sweets to neighbours to partake the happiness. But none of this happened at my client’s place. They were tensed, worried and awfully upset. You see, the money used to buy the Superbike was theirs, but the purchase of that bike went against their wishes – they did not want this. They had invested this money with a different purpose in their mind, and the investment was made not in their name but in their minor’s account.
I share this as parents often ask my counsel over similar matters. Which is the best investment for my children? How do I make investments for them? What are the tax benefits of investing in a minor’s name? What documents do we require to do the investments? And so on… Unfortunately, they fail to ask the most important and relevant question, which is, should I invest in the name of my minor child? So, what happens when the minor becomes a major? What are the advantages and disadvantages of making investments in the name of minor children?
Yes, you can make innumerable investments across different schemes of a Mutual fund in the name of your minor child; You could opt to open a Demat account and invest in shares; You could choose to hold bank Fixed Deposits in their name; or look at a host of Government Securities like PPF, SSY (Sukanya Samriddhi Yojana) or consider the monthly recurring in the Post Office. Keep in mind that the minor will be the first and sole holder in such a Mutual Fund folio or Demat account, under guardianship of his/her parents or the Court-appointed legal guardian. Investments made in the name of minors are determined based on their age, identified by their birth certificates, or any other valid age proof, like Passport, Aadhar card etc.
Now let me answer the most important question – what happens when the minor becomes a major or come of age where he/she can no longer be deemed a minor legally? All securities, units/shares, folios will be frozen for operation by the guardian from the date minor turns 18 years of age. All the transactions, SIP/STP or standing instructions will be suspended. The companies in which investments are done will sent a notice to the holders advising the minor to submit an application along with the prescribed forms and relevant documents, to provide a fresh KYC and change the status from minor to major. This means, that now on, the up-to-now minor’s own bank account will be linked, his pan card and KYC is taken on records and only his signatures are valid for any and all transactions pertaining to that investment.
With these procedures, the minor is now automatically aware of the existence of the investment as well as the absolute right to take the control of investments, from the age of 18, when he is yet in college and in keeping with his age, impulsive and influenceable. He could cash it, or do a partial redemption, or worse, alter the investment plan as per his or her peer’s advice, to make quick money by trading and speculating, as per his little or no understanding. Unfortunately, parents automatically lose control of the investments. You may have earmarked these investments in your financial plan for funding his foreign university studies, but instead he might just prefer a foreign holiday or a fast bike!
The only real solution to prevent this is to educate your ward on finances and getting them engaged in the decision-making process – about how and why it is invested early on. This will help them make better decisions later on. I suggest parents work with their children to provide an understanding of money from a young age. I always recommend that for parents, who are unsure about opening a minor account, can always make investments in their own names and can still pay their children university fees as and when needed! From a financial planning point of view, it makes so much more sense as it gives them the flexibility to use the money whenever they want, or then, if the child’s abilities indicate a change in the original plan, they could always apportion it towards their retirement corpus. And later in life, when they prove their sense of maturity and financial responsibility, you can always gift it to them.
Some may argue that investing in a minor’s name reduces tax liability. This is not at all true. As per the Income Tax Act, minors investment income, if gifted by parents, are clubbed in his mother or fathers Income Tax – whoever has the highest income.