Say you want to put ₹3,000 a month into a fund for your daughter, who is 6. You can, but the account will not be in your name and it will not be a joint account with you. Mutual funds for children work through a minor folio: the child is the only owner, you act as guardian, and the rules change on the day she turns 18. Many parents find this out only when a SIP stops without warning.
This guide explains how a minor folio is set up, who can be the guardian, how money goes in and comes out, how the tax works and what to do at 18. It is general information, not advice on any fund. The rules below come from SEBI circulars, AMFI’s operating guidelines and the Income-tax Act, 2025.
Can a child own mutual funds for children’s goals?
Yes. A person below 18 can be the unit holder, but a minor cannot sign contracts, so someone else has to operate the folio. AMFI’s guidelines for fund houses say the minor must be the sole holder. There cannot be a joint holder, either as first or second name, and the guardian is not a holder. The units belong to the child from day one, even though you decide when to buy and sell.
This has two practical effects. First, you cannot treat the folio as your own money to be withdrawn when a need arises in the family. The redemption money has to go to the child’s bank account, as covered below. Second, the folio is a clean way to ring-fence savings for education or a future goal, because it can only be touched by the guardian until the child becomes an adult.
Who can be the guardian
AMFI’s best practice circular of July 2020 allows only two kinds of guardian: a natural guardian, meaning the father or the mother, or a legal guardian appointed by a court. Grandparents, uncles and aunts cannot open a folio as guardian on their own. A grandparent who wants to help can give the money to a parent, who then invests it, or can seek a court appointment, which most families will not want to do.
The application form must state whether you are the father, the mother or a legal guardian. A fund house will ask for a document showing your relationship to the child if the proof of date of birth does not already show it. A birth certificate usually does, because it names the parents. For a court-appointed guardian, a copy of the court order is required.
Documents for opening a minor folio
The date of birth of the child is mandatory, along with a photocopy of proof. The AMFI circular lists these as acceptable:
- the child’s birth certificate;
- a school leaving certificate or a mark sheet from a state higher secondary board, ICSE, CBSE or similar;
- the child’s passport;
- any other suitable proof of the date of birth.
You will also need the guardian’s own KYC and bank details, and a bank account that can receive redemption money in the child’s name. Fund houses may ask for more under their own forms, so check the fund house’s minor application before you start.
How money goes in and comes out
Payment rules have changed once already. Earlier, fund houses took payment only from the minor’s account or a joint account of the minor and the guardian. A SEBI circular of 12 May 2023 (SEBI/HO/IMD/POD-II/CIR/P/2023/0069) relaxed this. Fund houses now accept the investment payment from the bank account of the minor, from the parent or legal guardian, or from a joint account of the minor with the parent or legal guardian, and were asked to make the changes from 15 June 2023. The SEBI page we could open shows only the circular’s title, date and number, so these details come from reproductions of the circular and fund house notices. Check your fund house’s current form. For many families this means you can invest straight from your own salary account.
Money coming out is stricter. Whoever paid in, the redemption proceeds are reported to go only to the minor’s verified bank account, which can be a joint account of the child with the parent or guardian, after the KYC formalities are done. So even if you invest from your own account, plan to have a bank account in the child’s name. Our guide to minor bank account rules covers what changes at 18.
| Point | Rule for a minor folio |
|---|---|
| Holder | Minor is the sole holder; no joint holders |
| Guardian | Father, mother or court-appointed legal guardian |
| Payment into the folio | From the minor’s, the parent’s or guardian’s account, or a joint account of the minor with the guardian |
| Redemption proceeds | Only to the minor’s verified bank account |
| SIP, STP, SWP | Run only until the day before the child turns 18 |
| At 18 | Folio frozen until the minor-to-major form is accepted |
SIPs in a child’s folio
A SIP is the usual way to invest in mutual funds for children, because small monthly amounts fit a household budget. As an illustration, ₹3,000 a month for 15 years is ₹5.4 lakh invested. At an assumed 10% a year, with the instalment at the start of each month and monthly compounding, that would grow to roughly ₹12.5 lakh. The 10% is only an assumption for illustration; actual returns can be lower, higher or negative in a given year. You can try your own figures in the SIP calculator or the lumpsum calculator.
One rule matters here. AMFI’s guidelines say a SIP, STP or SWP in a minor’s folio can be registered or run only until the date before the child attains majority, even if the mandate form was for a longer period. Fund houses build a system control that suspends the instruction on that date. A parent who set a 25-year SIP for a child aged 10 should know that it will stop at 18 and has to be started afresh by the child.
How tax works on mutual funds for children
The child’s folio is taxed in the hands of the parent, not the child, in most cases. Under the clubbing rule in section 99 of the Income-tax Act, 2025, the income of a minor child is added to the income of the parent whose total income is higher, if the parents’ marriage subsists. If the marriage no longer subsists, it goes to the parent who maintains the child. Once the income is added to one parent’s income, it is not shifted to the other parent in later years unless the tax officer is satisfied that it should be.
Two exceptions are in the Act. Income earned by the child from an activity where the child’s own skill, talent or specialised knowledge is applied is not clubbed. Nor is income of a child with a disability of the kind specified in the Act. Capital gains from a mutual fund held in the folio do not fall in either exception. Up to ₹1,500 of the child’s income per minor child is excluded from the clubbed amount. Our guide on clubbing of income explains the rule in full.
The type of tax does not change. Gains on an equity-oriented fund sold after a year are long-term, taxed at 12.5% on the part above ₹1.25 lakh in a year, where securities transaction tax is paid. Short-term gains on such units are taxed at 20% (sections 196 and 198). Other types of funds follow different rules, covered in our guide to debt funds. AMFI’s circular also says that where the minor’s PAN is in the folio, tax deducted at source is paid against that PAN, so that parents can report the minor’s dividend in the return of the parent in whose income it is clubbed.
Your gift to the child is a different matter. The Act exempts money or property received from a relative, so the money you put into the child’s folio is not taxed as a gift in the child’s hands. Only the income it later earns is clubbed with yours.
What happens when the child turns 18
On the day she becomes an adult, the folio is frozen. Your authority as guardian ends that day, and the fund house cannot accept a transaction from you. The units belong to her. Running SIPs, STPs and SWPs are discontinued from that date. Dividends and reinvestments that are corporate actions and not investor-driven continue to be processed.
The fund house is supposed to write to the registered address at least 30 days before she turns 18, with a minor-to-major form. AMFI’s circular, quoting SEBI’s December 2019 circular, says no further transactions are allowed until the status is changed. Before submitting the form, AMFI’s guidelines say she should:
- apply for a PAN, if she does not have one;
- complete her own KYC;
- change her existing bank account from minor to major, or open a new account in her own name.
The documents to submit with the form are a copy of her PAN card, a KYC acknowledgement or a filled KYC form, a cancelled cheque with her name pre-printed or her latest bank statement or passbook, and a nomination form. Her signature on the form is attested by the parent or guardian whose signature is registered against the folio, by a notary or a judicial magistrate first class, or by her banker in the prescribed format. A fresh SIP mandate is needed if she wishes to continue the SIP.
Do not leave this to the last week. A frozen folio cannot be redeemed, so a child who needs fee money in the first year of college could be stuck. Tell your child about the folio before 18.
Changing the guardian
If a parent dies or both parents agree to change the guardian, the fund house follows a set process. The new guardian must give a form in the prescribed format with a PAN copy, a KYC acknowledgement and a cancelled cheque showing the change in the minor’s bank account. If the earlier guardian is alive, a consent letter from that guardian or a court order is needed. If a guardian has died, a death certificate attested by a notary, a judicial magistrate first class or a gazetted officer is required. The new guardian must also be a father, a mother or a court-appointed guardian, and must have registered the signature with the child’s bank.
Mistakes parents make with minor folios
- Opening the folio in a grandparent’s name for the child’s benefit, which is not a minor folio.
- Setting a SIP that runs beyond the 18th birthday and assuming it will continue.
- Forgetting that redemption proceeds go to the child’s own account, not yours.
- Not reporting the clubbed income in the parent’s return.
- Assuming that the child can freely use the money after 18 without finishing the KYC and form.
Key takeaways
- Only a father, a mother or a court-appointed guardian can invest for a minor, and the child is the sole holder.
- You can pay in from your own account, but redemption money goes only to the child’s verified bank account.
- SIPs and other standing instructions stop when the child turns 18; the folio is frozen until the minor-to-major form is accepted.
- Income and gains are generally clubbed with the higher-earning parent, with ₹1,500 excluded for each child.
- With mutual funds for children, prepare the PAN, KYC and bank account some months before the 18th birthday.
If you are comparing options, our guides on SIP basics, child education planning and minor bank accounts cover the neighbouring decisions.
