Indian stock markets are no short of investment opportunities. Every day, the market provides an opportunity to take part and make profits. To participate in the markets, you need a demat account – a digital platform that helps you buy and sell in the markets electronically. But what if you want your minor child to invest into markets? What if, being a child you’re self-interested in starting your investment journey early, even before you turn 18?
The good news is, yes, minors can open demat accounts in India. However, there are some key limitations and benefits to understand before you rush to open one.
Can Minors Really Hold Demat Accounts?
Absolutely! While a minor (someone under 18) cannot enter into financial agreements themselves due to the Indian Contracts Act (1872), the Companies Act (2013) allows anyone to own shares in publicly listed companies. This opens the door for minors to hold demat accounts, but with a twist: a parent or legal guardian must act as the account holder and manage all transactions until the minor reaches their adulthood.
Limitations of Minor Demat Accounts
While opening a demat account for a minor allows them to participate in the stock market, it’s important to be aware of the restrictions:
- Trading Restrictions: Minors cannot actively buy or sell shares themselves. All transactions must be initiated and authorized by the guardian.
- Guardian Involvement: The guardian is responsible for managing the account, making investment decisions, and overseeing all activity.
- Account Type: Minor demat accounts are limited to delivery-based equity trading. This means buying shares with the intention of holding them for the long term, not for short-term gains through intraday trading. Additionally, minors cannot invest in derivatives like options or futures contracts.
- Linked Trading Account: Minors cannot have a linked online trading account. Since guardians manage the account, they will need to place orders directly through the broker’s platform.
Benefits of Minor Demat Accounts
Despite the limitations, there are some significant advantages to opening a demat account for a minor:
- Early Investment Strategy: Children can start their investment journey early. With this, children are introduced to valuable financial habits and a long-term investment mindset from a young age.
- Gifting and Inheritance: If a minor receives shares as a gift or through inheritance, a demat account provides a safe and secure way to hold them.
- Long-Term Growth: By holding shares for the long term, the minor can potentially benefit from capital appreciation, where the share value increases over time. They also learn and witness the power of compounding.
- Joint Investment with Guardian: Guardians can co-invest alongside the minor, providing invaluable guidance and fostering a shared learning experience.
Opening a Minor Demat Account
The process of opening a demat account for a minor is same as opening a regular account. You’ll need to approach a SEBI-registered stockbroker and provide the necessary KYC (Know Your Customer) documents for both the minor and the guardian. These typically include proof of identity, address, and PAN card. The broker will guide you through the specific requirements and steps involved on their account opening platform.
Before You Open a Minor Demat Account
While minor demat accounts offer an interesting option, it’s crucial to consider the following:
- Investment Goals: You must clearly define the investment goals for the minor. They must know whether they are aiming for long-term wealth creation or mid-term gains?
- Risk Tolerance: You should understand the inherent risks involved in the stock market and should help the minor understand them. You must ensure that the investment aligns with the minor’s future financial needs and risk tolerance.
- Long-Term Commitment: Investing by and for a minor is a long-term commitment. As a minor and guardian, both of you must be prepared to manage the account responsibly until the minor reaches their adulthood.
Minor demat accounts is a valuable tool for introducing young people to the world of investing and promoting financial responsibility. However, it’s essential to understand the risks and limitations to ensure that the investment strategy aligns with the minor’s long-term goals. If you are not certain about your and minors’ financial goals, consulting a financial advisor will be fruitful. These advisors will provide valuable guidance and personalized recommendations before you make any investment decisions for a minor.
