How can I invest in a mutual fund in my child’s name?

As a parent, you want to secure your child’s financial future, providing them with the means to achieve their dreams and aspirations. Investing in mutual funds can be a powerful tool to accomplish this goal. Mutual funds offer a diversified portfolio of stocks or bonds, managed by professional fund managers, making them a suitable option for long-term wealth creation. In India, mutual fund houses allow for investment in the name of children.

Benefits of investing in mutual funds for children

Early start: Investing early allows you to harness the power of compounding, where the returns earned on your investments generate further returns, accelerating wealth accumulation over time.

Disciplined investing: Investing regularly, even in small amounts, instils financial discipline and helps children develop a responsible approach to money management.

Long-term goals: Mutual funds align well with long-term financial goals, such as higher education, career advancement, or starting a business.

Professional management: Mutual funds are managed by experienced professionals who make informed investment decisions, reducing the risks associated with individual stock picking.

Diversification: Mutual funds offer a diversified mix of securities, mitigating the impact of market fluctuations and reducing overall risk.

Procedure for investing in mutual funds for children

You can invest in the name of your children directly through the Asset Management Company (AMC), i.e., a mutual fund house. Typically you can invest in the name of your children offline. Investing in the name of a minor can be done online too. However, there are very few new-age platforms that allow online investments for minors. Steps pertaining to investment in the name of the child through offline mode are as follows: 

Child’s documents: Gather the necessary documents, including the child’s birth certificate, proof of your guardianship, and address proof.

KYC compliance: Complete the Know Your Customer (KYC) process for both yourself, as the guardian, and the child. This involves submitting the required documents and verifying your identity.

Form filling: Fill out the necessary forms provided by your AMC for investment in the name of your children. 

Mutual fund selection: Choose mutual funds that align with your child’s risk tolerance and long-term financial goals. Consider factors such as investment horizon, risk profile, and fund performance.

Investment initiation: Initiate the investment process by selecting the desired mutual fund scheme and specifying the investment amount and frequency.

Taxation of mutual fund investments in children’s name

Tax liability: If the source of funds (money) invested in the mutual funds arises from the parents of the children until the child attains the age of 18, any capital gains arising from the sale of the mutual fund will be clubbed with the income of the parent earning higher in accordance with Section 64 of the Income Tax Act, irrespective of which parent out of the two had initially provided the funds (money). 

Minor’s status: Once the child turns 18, they become the sole owner of the investment and are responsible for paying taxes on the income and capital gains generated from the mutual fund investments.

Things to keep in mind when investing for children

Redemption: As per SEBI circular number -SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24, 2019 (as amended from time to time): all redemptions from mutual fund investments made in the name of a minor shall be credited only to the verified bank account of the minor.

Financial goals: Clearly define your child’s financial goals to determine the investment horizon and risk tolerance.

Diversification: Diversify across different mutual fund schemes to reduce risk and enhance the potential for returns.

Regular monitoring: Regularly review the performance of the chosen mutual funds and make adjustments as needed.

Child’s involvement: Involve your child in age-appropriate financial discussions to foster financial awareness and responsibility.

Seek professional guidance: Consult a financial advisor for personalised advice tailored to your child’s specific financial needs and goals.

In conclusion, investing in mutual funds for children can be an effective strategy to secure their financial future. By starting early, investing regularly, and making informed decisions, you can help your child achieve their financial aspirations and build a strong foundation for their future success. 

Remember to carefully consider your child’s risk tolerance, investment horizon, and financial goals when making investment decisions. Consult a financial advisor for personalised guidance and ensure you understand the taxation implications of investing in mutual funds for children.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

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Updated: 01 Dec 2023, 09:30 AM IST