One of the best gifts as parents or guardians that you can give your childrenis an early start to investment. And what better way to do that than by investing on their behalf early on and then gifting it to them as they come of age. 

Investing as a habit must be inculcated in children at an early age. Of course, since they would not be in a position to save for themselvesas parents or guardians you can start an investment in the child’s name and make them a part of it by explaining the process and involving them in it. This is important as it would help them understand the importance of saving and investment. 

Also, for you as a caregiver, it is important to plan for the child’s future,be it education or just to give them a feeling of financial security. The cost of education and our standard of living is constantly on the rise. Accounting for inflation, by the time the child matures into an adult, these expenses will be much higher. So, starting an investment at an early age on can go a long way in building a large enough corpus to meet these expenses in the future.

Long-term Investment

Now, making investments depends on the financial goal that must be achieved. When it comes to children, most financial plans are long-term for which exposure to equities would be ideal. Investments in debt can be looked if the time frame is smaller, say less than three years. Also, in such cases it is best to consult a financial advisor for the right mix of investment products for such a short-term financial goal for your child.

When the financial goal is for the long-term, a significant portion of the investment should be in equities due to its ability to generate higher returns helping build a large corpus over a long period of time. The best option is to invest in long-term equity fund as the risk is comparatively lower. A diversified equity mutual fund scheme invests in a range of equity shares of different companies from varied sectors. This diversification helps to spread the risk across the fund, and also helpsmaximise the return potential. 

Investing on behalf of a Minor

When it comesto investing on behalf of a minor in a mutual fund scheme, you can either choose to invest in any mutual fund equity or debt mutual fundor choose from a variety of children’s benefit mutual funds. Also, the lumpsum route may be suitable if you have a large amount at hand or you could even opt for the SIP route and gradually build the corpus.

To begin with, any mutual fund investment in the name of the minor will be held in a joint accountwith a parent or guardian. However, please remember that the minor will be the first and sole holdereven when it is the parent orguardian who will make the investment on behalf of the minor. Before you start investing, a mutual fund folio account needs to be created after completing the KYC procedure in the name of the minor. The folio cannot be held in joint names. Proof of age and date of birth documents of the minor are required to open the folio along with other documents that establish the relationship of the parent or guardian with the minor. As the minor cannot take financial decisions, the parent or guardian will be the custodian of the account. The investment amount can come either from the parent’s or guardian’s bank account or child’s minor account. 

On attaining Majority (18 yrs of age)

Once the minor attains majority i.e. 18 years of age, all investments will be suspended, and the folio will be frozen for the operational activities by the parent or guardian. The child then needs to complete the KYC procedure to change the status of folio from minor to major and then can carry out the activities in their own name. 

In case of children’s benefit funds, the investment and folio creation processes remain the same. The only differentiator is that these funds come with a lock-in period of 5 years or till the minor attains the age of 18 years or whichever is earlier.So, the investment cannot be withdrawn any time before either of these eventualities. There are a few children’s benefit mutual funds in the industry that are available in the market.

With respect to taxation, these funds get taxed as per the mutual fund taxation rules. The main point to note is that when the child is a minor in the fund, the tax liability falls on the parent or guardian. The tax liability changes hands and passes on to the child once the child turns 18 and becomes the owner of the account.For further details on taxation, please consult a financial advisor.

Secure Your Child’s Future

The world around us changes much faster than we can comprehend. While we may deal well with it as adults, but when it comes to our children our worries multiply. We want the best for them and wish to equip them with the best resources to cope with this everchanging world. A good education along with a sense of financial security are needed for children’s well-being and overall growth. It is important for your child to know that they are growing up in a safe environment where they can look forward to a happy and secure future.

So start planning for your child’s future today by making the right investments. For a detailed plan, please consult expert financial advisors.

Donny white