Children's day: A guide to securing your child's future

In the constant swirl of daily life, parents grapple with the timeless question: How can we secure our child's future? With education costs soaring and parents becoming aspirational to send their kids abroad for studies, financial concerns echo louder than ever.

This Children's Day, we tell you how to invest wisely in mutual funds for your child, especially if you should start investments in your child's name or your own.

Investing in mutual funds in the name of the child (minor)

As a parent, investing in a child's name presents operational challenges. You cannot start a mutual fund in the name of your minor child through many online platforms, such as Groww, Zerodha, and 5paisa.

Moreover, only select fund houses offer the online option through their website. For most, investors have to visit the branch of the fund house to start a mutual fund in the child's name. The process involves documentation, including the parent's/guardian's proof of the relationship with the minor and the minor's birthdate.

However, the complications don't end there. The child needs to have a bank account, as the redemption proceeds from the mutual fund will go to that account only. This may pose a risk when the minor gains access to money upon reaching adulthood, especially if they don't know how to manage money.

Also, the transition from minor to major involves paperwork, including filing a MAM (minor attaining majority) form with the AMC requiring the minor's KYC, PAN, and bank account details.
All in all, a cumbersome process.

That said, starting a mutual fund in your child's name can be considered, especially if you are prone to dipping into your investments now and again. Why? Investing in your child's name is a potent emotion and motivator. It can be a strong deterrent whenever you have impulsive urges to withdraw money from your kid's fund.

Let's talk about the taxation aspect

Until your child is under 18, realised gains from the fund will be clubbed with your income and taxed. Even dividend income gets added to your total annual income.

Once they turn 18, your child will be required to pay taxes on the capital gains in case of any redemption from the fund. However, it is noteworthy that annual income of up to Rs 3,00,000 is exempt from tax under the new tax regime.

Choosing the right option

The dilemma extends to where to invest. Most of us search for children-specific mutual funds. On paper, the logic appears sound. But read between the lines, and you'll notice that most of these funds are a clever marketing ploy.

Let's illustrate why we say this: A typical children-targeted fund is hybrid in nature - it holds equity and debt instruments - and doesn't allow you to redeem any money before five years. On the other hand, a regular hybrid fund has no lock-in period, not even a week's.

What you should do

Create a separate folio, i.e. start a mutual fund investment in your name and make your child a nominee. This will offer a practical solution to the challenges of starting a mutual fund in the child's name.

Also read: Can I gift a mutual fund to my grandchildren?