If you are a parent or going to be a parent, then it is obvious that you want your kids to have the best of everything. So, you need to plan for your child’s education if you want your kids to get the education of their dreams.
Mutual funds can be a great investment tool to help you plan for your child’s future. You may want them to become familiar with investments from a very tender age and let them manage money when they go to college.
However, your kids can’t invest in mutual funds before they turn 18. But, the minor's legal guardian or parent can make investments on their behalf. You need to know that a minor's mutual fund investment cannot be held jointly. Your child’s name should be on the account.
When your child is young to make the right financial decisions, you can invest in a mutual fund as a parent or a guardian on your minor’s behalf. You can make a one-time lump sum investment or set up systematic investment plans to help you plan for your child's future.
Documents required to invest in a mutual fund on behalf of our children
The first document that you will need is a birth certificate or the passport that is issued by the government to verify the child's age and date of birth. If you are a parent, your name on one of the documents is enough.
What will happen when your child turns 18?
When your child turns 18, you will not be able to continue investing as a parent or a guardian on their behalf. The mutual fund house will send you a letter informing the situation and the steps to take so that your child can continue investing in the same mutual fund.
You also have to upgrade their savings account from minor to major status. the Same process needs to be repeated for the mutual fund account as well. Your kid can invest in the same folios when the fund house converts the account to an individual account.
Advantages of investing in a mutual fund in your minor's name
Become more committed: When you invest on your child's behalf, you are more likely to be committed to your child's financial needs. You will not be tempted to use the money that you are saving for your other purposes such as repaying your home loan or any other purpose. As a result, you will be disciplined and this, in turn, will help your child to achieve their higher education dreams.
Install good money habits when they are young: Having a separate mutual fund investment account under their name can help children become interested in saving and investment. They will also learn the benefits of saving and investing and the impact of every investment.
Nudging them to save the money that they receive from family elders during festivals and birthdays in the mutual fund will go a long way in helping them become financially savvy individuals.
You can save money on taxes by investing in your child's name. Any capital gains from mutual fund investments are taxable in your hands until the kid reaches the age of majority. But, after the child turns 18, any tax on capital gains will be taxed only in the child's hands. As your child may not have a large income, the tax incidence on your child will be much lower than if you had invested under your name.
The Drawbacks of Investing in Mutual Funds in the Name of a Minor
Additional paperwork: You'll need to change the single account holder's status from Minor to Major when your child reaches 18. Till the process is completed, the fund house will stop all transactions. So, a drawback of investing in mutual funds in your minor’s name is that you will need to fill out additional documentation.
Your child may not be financially mature at 18: When your child turns 18, the entire responsibility of managing the fund will fall on their shoulders. Moreover, they may not be mature to make the best decision with the accumulated corpus.
Investing in a mutual fund on your children's behalf can be a great method to invest in their future education. This will help kids learn the value of compounding and investing at a young age.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all schemes related documents carefully.