Araina had received a piggy bank as a gift from her grandfather 2 years ago when he had introduced her to the idea of saving money. And, she’s been excited with the concept of saving money ever since.

When her piggy bank was nearly full, she asked her parents to open it. To her surprise, she had collected a sum of Rs 5000, and was excited to buy a video game out and insisted on it to her parents.

But before giving in to her demand, her parents helped her recognise how every rupee wisely saved can create a sizeable corpus (here Rs 5000) over the years to help accomplish materialistic and financial goals. They introduced her to the “value” of money, and even made her realise how compounding works.

Later, over the years, they invested a small portion systematically in mutual funds in her name through SIP (Systematic Investment Plan).

Yes, you heard it right. Children can also invest in mutual funds, let’s find out how:

Mutual Fund investing for minors

You can invest in mutual fund schemes in the name of your minor child and there isn’t an age limit or restriction on the investment amount. Parents or a legal guardian can invest and transact on behalf of a minor child.

And what are the documents required for investing?

You need to submit a valid document for proof of your child’s age and your relationship with the child.

It is mandatory for the guardian to comply with KYC regulations.

Further, you also need to provide your bank account number. As the investment will route through your account (as a parent / guardian), you also need to 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 to opt for: SIP or STP?

Well, both are sensible modes to invest in mutual funds. But when you’re introducing systematic ‘saving and investing’ at regular intervals to your child, the Systematic Investment Plan (SIP) resonates better as opposed to Systematic Transfer Plan (STP) where a certain sum is already invested in the respective fund, and from there, this can be systematically transferred / invested to another fund.

As parents, you strive to provide sound education to your child. 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).

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, 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, re- allocating 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.

As far as tax benefits go, there are no tax benefits for holding investments in your minor child's name. Income on these investments will be added to your total income and tax will be levied thereon.

So, be wise while you’re planning to invest in mutual funds for your child’s future. Take the right decisions.

Happy Investing!
 

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Comments
hafeezur@gmail.com Jan 01, 2018 "As far as tax benefits go, there are no tax benefits for holding investments in your minor child's name. Income on these investments will be added to your total income and tax will be levied thereon." This should apply only if the mutual funds held under child's name are Debt mutual funds, right? As, these funds are indeed taxable even after holding it for over 3 years. So, this should not apply for Equity mutual funds, if held under child's name, since they are anyway not taxable after the initial holding period of 1 year. Correct?
hafeezur@gmail.com Jan 01, 2018 "As far as tax benefits go, there are no tax benefits for holding investments in your minor child's name. Income on these investments will be added to your total income and tax will be levied thereon." This should apply only if the mutual funds held under child's name are Debt mutual funds, right? As, these funds are indeed taxable even after holding it for over 3 years. So, this should not apply for Equity mutual funds, if held under child's name, since they are anyway not taxable after the initial holding period of 1 year. Correct?

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