Do you remember your parent’s monthly visits to bank or post-office? Or did you have an agent/relationship manger visiting home each month?
Whichever way your parents saved every penny for your future, they strived to provide you a bright future. In most cases, they saved money in recurring or fixed deposits.
And now that you are a parent, you wish to do the same for your child. Isn’t It?
You wish to provide the best for your child — education, health-care, and lifestyle. You intend to secure your child’s future in every possible way. And because they mean the world to you; you are willing to save and invest in the best available financial instruments.
As the interest rates are on a downward trend, fixed and recurring deposits have lost their sheen. It is possible that you prefer investing in other instruments like mutual funds.
But, did you know that now you can invest in mutual fund schemes for your minor child (individuals below 18-years of age)?
Yes, you heard it right. Minors can also invest in mutual fund schemes.
Parents or a legal guardian can invest and transact in mutual fund schemes on behalf of a minor child.
A mutual fund scheme, as the name suggests, is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds, short-term money-market instruments, other securities or assets, and/or a combination of these investments.
To learn more about mutual funds watch this video:
Now, you can either opt for Lump Sum Investment, Systematic Investment Plan or Systematic Transfer Plan as per your convenience. Well, all three are sensible modes to invest in mutual fund schemes. Let’s find out how to invest for Minors:
Lump Sum Mode
If you have a big sum of say Rs 1 lakh in your bank account which you want to keep aside for your child’s future say higher education or marriage. Consider investing this corpus via the lump sum investment mode. And if you have a long-term horizon of more than five years, it would be best to opt for an equity mutual fund. Equity as an asset class in the past has out performed most of the other asset classes. And investing in equity mutual fund schemes will indirectly give exposure to equity. This gives you an edge over debt mutual fund to create wealth and beat the inflation bug. But beware! Investing all your money at one point, may call for market risk. And so, to reduce this risk, there are options called SIPs and STPs.
Systematic Investment Plan Mode
You can invest in a Systematic Investment Plan of a mutual fund scheme with a minimum Rs 500 a month. So, if you do not have large investible surplus, this gives you the opportunity to start investing a little every month in a mutual fund scheme for your minor child.
Simply put, a SIP refers to Systematic Investment Plan which is a mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk.
As parents, you strive to provide sound education to your child. And to fulfil this financial goal (among many others), investing in SIPs of the best mutual fund schemes is a prudent approach to follow. And remember, the earlier you begin the better it is. With a longer time-horizon on your side, the power of compounding works better.
It is the case of an early bird getting a bigger worm — in personal finance parlance, building a bigger corpus to achieve the financial goal(s).
You can use our Mutual Fund Calculator for lump sum and SIP Calculator to calculate future returns on your mutual fund investments.
Systematic Transfer Plan Mode
Under STP, a lump sum amount you invested in a fund earlier can be transferred at regular intervals systematically in a piecemeal manner into another mutual scheme (as desired by you) of the same mutual fund house.
In today’s dynamic market scenario, while one may aim to take advantage of the favourable weather in both equity and debt markets, there is an inherent risk involved. Thus, when taking exposure to these respective asset classes, it is important to adopt a cautious approach, and proceed smartly and prudently.
You can use our STP Calculator to calculate your returns.
And what are the documents required?
Documents required for Minor to make a MF investment
Well, documentation in this case is simple.
Proof of Age of Minor: You need to submit a valid document for proof of your child’s age, i.e. a copy of the birth certificate.
Proof of Relationship: You need to provide documents which states guardian’s (natural/ legal) relationship with the minor.
Documents of Guardian: It is mandatory for the guardian to comply with KYC regulations.
Bank Account Details: If the investment will route through your account (as a parent / guardian), you will need to provide your bank account details. And, submit the Third-Party Declaration Form along with your bank’s acknowledgement letter.
Alternatively, you can directly route these transactions through your child’s bank account, but furnishing the bank’s acknowledgment letter is a must.
What happens when your child turns 18?
As the funds are in your child's name, you do not have the authority to redeem the fund once your child becomes a major. So, the first step is to complete his/her PAN and KYC formalities. And change his/her bank account to the status of a major from minor.
Your SIP instruction will be valid only until the day your child attains majority even if your SIP is perpetual.
So, is it a wise choice to invest in your child’s name?
If you wish to avoid unnecessary paper work and rigmarole, refrain from investing in your child’s name. Instead, invest in your name as a parent/guardian in respective mutual fund schemes and nominate your child as a nominee. You can also become a joint-account holder and transact as and when needed. This will simplify the formalities and make it easier to manage it.
Holding funds in your name will give you more flexibility to modify the portfolio if needed. But if the funds are in the name of minor son/daughter, reallocation has to be with your child's consent once his/her age turns major. Also, the funds will be directly transferred to your child's bank account and hence, you will not have any control on it.
Hence, joint account holding will give you flexibility and control over your investments.
Tax Advantage for parents
If you make investments in Equity Linked Savings Scheme, you can enjoy tax benefits under Section 80C of Income Tax Act 1961. Whereby your taxable income is reduced by the amount equivalent to your investments. Parents/guardian can claim up to Rs 1.5 Lakh under Section 80C.
Additionally, if you invest in taxable instrument in the name of your minor child, you can claim an annual exemption of up to Rs 1500 per child under Section 10 (32) of the Income Tax Act, 1961. For instance, interest income for a year is Rs 7000, then as a parent/guardian you can claim for an exemption up to Rs 1500 and this reduces your taxable income by same amount.
From a tax point of view any income/gains earned from investments will be added to your income. And so, you do not receive an additional tax advantage.
To Conclude
Investing in mutual fund schemes for minors can be a disciplined approach to investing towards achieving their future goals. However, it does not offer any additional advantage/incentive to mutual fund investing for minors.
So, be wise while you’re planning to invest in mutual funds for your child’s future. Make the right, smart decisions and avoid getting carried away with emotions. Evaluate your needs, goals, and life plans before signing a cheque. Nothing wrong in making investments on behalf of your child, but remember this folio will not be operable once your child attains majority. You can instead choose to invest the same money on your name with specific life goals for the long term.
Choice is yours, hence, choose wisely!
Happy Investing!
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Try our SIP Calculator to find future value of your SIP contributions.
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