Starting mutual fund investments for your child
Parents would like to invest in their children’s name to take care of their future needs. The interest rate on bank’s savings account and fixed deposit is very low. By investing in the mutual fund, it is possible to expect higher returns on a long-term basis. As the child reaches 18 years, the corpus can be used for higher education and other useful purposes. Instead of investing in stock market directly, you can choose mutual funds as the fund management will be done by experts. The way the money should be invested will be decided by fund managers. The money pooled from various customers will be invested in an efficient way to draw higher returns.
Why mutual funds?
- Purpose of investment – If you are poised to choose mutual fund investment, you should figure out the reasons for the investment. Savings are important to take care of living expenses, medical expenses, travel expenses and education expenses.
- Investment period – You should be aware of the duration of the investment. The selection of the mutual fund scheme is based on your immediate, short-term and long-term needs. The calculators available on the mutual fund websites will help you calculate the returns as per your investment horizon.
- Risk-bearing potential – The child plan should be selected as per your risk-bearing potential. The investment in mutual funds is not guaranteed to deliver returns. The risk factor will be from low, moderate and high as per the type of fund. Equity funds pose the highest level of returns and they are set to deliver excellent returns in the long run (10 years to 15 years).
- Advantages over other types of funds – Before choosing mutual funds as your favorite investment option for your child, parents should consider other investment options as well. The other options include fixed deposits, savings account and PPF account.
- Custodial account – The investment made in the name of the child should be managed by the custodian. Since the minor (less than 18 years old) cannot operate the mutual fund folio, the parent should take the responsibility until the child attains 18 years of age. The child will be the owner of the mutual fund investment. However, the mutual fund investment returns (dividends) and other proceeds will be credited to the parent’s account or the legal custodian’s account.
- Higher returns – by investing in mutual funds, it is possible to get higher returns than other kinds of financial instruments. By investing in equity-related funds, the money will be doubled in three years.
How to invest mutual funds in child’s name?
- If your child’s age is less than 18 years old, you can invest in the name of the child.
- There is no limit on the amount that can be invested in the child’s name
- The child will be sole holder of the fund. No joint holder is permitted and no nominee is allowed
- It is required to submit a valid document proof towards the age of the child and the relationship of the parent with the child.
- The guardian should provide the KYC documents such as identity proof and residence proof to the mutual fund house
- Third party declaration form should be submitted if the investment amount flows through the bank account of the parent
- Parents can start SIP in children’s name
Restrictions on the child’s mutual fund account
As soon as the child reaches 18 years of age,
- The SIP or STP will be stopped automatically.
- The folio will be frozen for operation by the guardian or parent
- The child should submit the PAN card, Aadhaar and other details
The KYC will be done in the name of the child after reaching the 18 years of age. The child will be able to operate the account on him/her and it is possible to include the nominee for the mutual fund folio.
Selection of the fund house
You should choose fund houses with the lowest possible expense. By choosing highly diversified funds, it is possible to invest money in different types of securities and the risk can be minimized. You can consult your financial advisor before subscribing to a fund.
If you are aware of the entry and exit load, the returns will be optimized. When the children reach 18 years, parents should educate them about mutual funds and you should help them manage their folios.
Mutual funds offer better returns than bank’s fixed deposits or recurring deposits. By investing in mutual funds, you can reap market-related gains in an indirect way. The growth obtained through the investment in mutual funds on behalf of children will fulfill the children’s needs in terms of education and other important milestones in life. Mutual funds which invest in blue-chip companies will earn good returns on long-term.