The stock market can be an extremely effective tool for creating wealth, and introducing this to minors could lay the groundwork for their financial future. In India, although minors due to legal constraints can’t independently practice stock trading, they can keep investments through a Demat Account for minors managed by a parent or legal guardian.
Understanding Demat Accounts for Minors
Demat accounts allow investors to hold shares and securities in electronic form. A demat account for minors can be opened in their name for anyone under 18 years of age but they must be managed by a guardian until they grow to be adults.
This arrangement guarantees that the guardian manages the investments on behalf of the minor while the beneficiary of the account will be the guardian.
Steps to Open a Demat Account for a Minor
1. Choose a Depository Participant
Select a registered DP that is associated with either the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL).
2. Complete the Application
Complete the account opening form with the minor’s and guardian’s details. Make sure that the information is current and accurate so that future discrepancies are minimized.
3. Submit Required Documents
Provide the following documents:
Proof of Identity: PAN cards of the minor along with the guardian.
Aadhaar card, passport, or electricity bill for both parties.
Birth Certificate of the Minor: To confirm the age of the minor.
Documents establishing the Relationship between the minor and guardian – Guardian’s Relationship Proof:
4. In-Person Verification (IPV)
The minor and guardian might need to be present for IPV, physically or through a video call depending on the methods of the DP.
5. Account Activation
On successful verification, the Demat account will be activated enabling the guardian to manage investments on behalf of the minor.
Limitations on Minor Demat Accounts
Opening a demat account for a minor offers numerous benefits but there are some limitations:
- Minors may not trade in intraday trading or even invest in derivative instruments such as futures and options because of their speculative nature.The investments are limited to the equity delivery trades.
- No Joint accounts: A minor demat account can’t be held jointly with another individual. It has to be operated by the guardian solely in the name of the minor.
- Account Transition to Majority: Once the minor reaches 18, the account becomes inactive until the individual completes the necessary formalities to convert it into a regular demat account. This also requires submitting new bank details and submitting updated KYC documents.
Understanding DP Charges
Charges for the depository Participant (DP) are fees charged by the depository and the DP when securities are debited from the demat account typically during a sale transaction.
These fees cover the costs of storing as well as transferring securities in electronic form. If shares are sold by a number of companies in a single day, for example, DP charges will be applied to each share sold by each company. It’s essential to be mindful of these charges, as they could impact the overall returns from investments.
To open a Demat Account for Minors: Benefits
1. Early Financial Literacy
Introducing minors to the world of investing encourages financial literacy from a young age, equipping them with important skills for future financial decisions.
2. Long-Term Wealth Accumulation
Investing early allows for a longer investment horizon, enabling the potential of compounding to work in favor of the minor’s financial growth.
3. Dedicated Savings for Future Needs
Parents can set aside investments specifically for their child’s future expenses, such as higher education or marriage, ensuring financial preparedness.
Conclusion
The opening of a Demat account for the minors is a strategic move to instill financial discipline and secure a prosperous future for the younger generation.
While there are certain limitations and costs, such as DP charges, the advantages of early exposure to financial markets and disciplined investment practices far outweigh the drawbacks.
Guardians can manage their investments on behalf of their minor children by understanding the regulatory requirements as well as the operational aspects.
