Investing in Children's Mutual Funds: Comprehensive Guide
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There is probably no parent in the world who doesn't want to secure their child's future. This could be anything from leaving them an inheritance or making sure they have a corpus for their higher education. One of the best ways to do this is by investing in mutual funds. This could be the SIP (Systematic Investment Plan) route or a lumpsum investment. There might be some doubts in the minds of parents which we are going to try and address in this blog:

What are Children Mutual Funds?

  • Children's Mutual Funds are a specific investment product designed to aid in financial planning for children's future needs. These funds allow parents, guardians, or other adults to invest money over time, which can be used for significant future expenses like higher education or weddings.
  • These funds usually have a lock-in period or a condition that the child must be at a certain age before the money can be withdrawn. This ensures the money remains invested for a long time, allowing it to grow.
  • Investing in these funds can offer a disciplined and systematic approach to saving money for a child's future. They are managed by professional fund managers who make investment decisions based on market trends and research.
  • While investing in a Children's Mutual Fund, reviewing the fund's past performance, management quality, and risk level is recommended.

Documentation Required for Investing in a Mutual Fund for Child

When initiating an investment in a mutual fund under a child's name, the guardian must provide certain specific documents. These are essential to confirm the child's age and the relationship between the child and the guardian.

  1. Proof of the Child's Age: This is crucial as these investments are specifically designed for minors and have certain age-related conditions attached to them. A birth certificate or passport copy can prove the child's age.
  2. Proof of the Guardian's Relationship with the Child: This is another essential document for investing in a Children's Mutual Fund. It helps establish the legal relationship between the guardian and the child, ensuring an authorised person is investing. Again, a birth certificate or a passport copy can be used to demonstrate this relationship.
  3. Submission of Documents: These documents must be submitted during the initial investment. They are necessary to validate the details provided during the investment process.
  4. Future Investments: The guardian must not submit these documents again for subsequent investments with the same fund house. The fund house retains these details on record, simplifying the process for future investments.

Popular Children's Funds Recommended by Kotak Bank

Investment Options

Description

Key Benefits/Returns

ULIP For Children (Unit Linked Insurance Plan) A financial plan that offers both insurance and investment opportunities Triple benefits with higher returns; Continued policy premiums in case of parent's demise
SIP (Systematic Investment Plan) Mutual fund schemes where the bank invests amounts in market funds Better return on investment but influenced by market fluctuations
Sukanya Samriddhi Yojana (SSY) A savings scheme available for girl children in India Reliable government scheme with good interest rates (around 7% to 8%); Matures when the girl turns 21 years old
Debt Fund - Market Fund One-time investment option that offers better returns than simple bank deposits Active Duration management and option to invest for Short,medium, long term
PPF - Public Provident Fund Long-term investment that is highly secure with funds locked in for 15 years Generates returns at an interest rate of around 8% or above
Invest in Gold Reliable long-term investment that fights inflation High degree of liquidity; However, experts advise against investing in physical form due to storage risks
Equity Mutual Funds Deposits made to equity mutual funds offer various investment options Longer time horizon of 10-15 years with annual returns between 12% and 15%
Recurring Deposits Low-risk investment strategy with high-interest rates Future plans can be created by locking the RD; Available through banks and post offices

How to Invest in Mutual Fund Child Plan

Investing in a mutual fund child plan is a smart way to secure your child's future. It allows for the growth of funds over time that can be used for the child's education, marriage or other financial needs. Here is a step-by-step guide to help you open a mutual fund account in your child's name:

  1. Choose a Suitable Mutual Fund Scheme: Various mutual fund schemes in India are specifically designed for children. Research a scheme that aligns with your financial goals and risk tolerance.
  2. Complete the KYC Process: You must complete the Know Your Customer (KYC) process before investing. This one-time process includes providing details like PAN number, address proof, and identity proof.
  3. Open a Minor's Account: The mutual fund account should be opened in the minor's name with the parent/guardian as the custodian. The custodian will manage the account until the child turns 18.
  4. Provide Necessary Documents: You must provide proof of the child's age and your relationship with the child. Acceptable documents include a birth certificate or passport copy.
  5. Invest in the Chosen Scheme: Once the account is set up and all documents are verified, you can invest in the chosen scheme. You can choose between a lump sum or Systematic Investment Plan (SIP) mode of investment.
  6. Monitor the Investment: Regularly review the mutual fund's performance and make necessary adjustments.

 

Please note that once the child turns 18, the account must be transferred to their name. The child should then complete a new KYC process to continue the account.

Pros & Cons of Investing in Children Mutual Fund

Parameters Pros Cons
Control over Funds The funds are managed by a professional fund manager who makes informed decisions based on market trends. Once the child reaches the age of majority (18 years in India), they gain control over the investment, which can be a concern if they lack financial maturity.
Potential for Wealth Creation Given the long-term nature of these investments, they have the potential to generate substantial returns over time. Market volatility can impact the returns, and there is a possibility of not getting the expected returns.
Financial Security These funds can provide financial security for the child's future, whether for education, marriage, or other needs. If the investment fails, it may not provide the anticipated financial security.
Tax Implications The earnings from mutual funds are subject to tax, which can be a source of income tax planning. The tax implications can be complex. If the income from the mutual funds in the name of a minor exceeds ₹1,500, it gets clubbed with the income of the parent who earns more.
Investment Flexibility Investors can invest either as a lump sum or via a Systematic Investment Plan (SIP). There are restrictions on withdrawal before the child turns 18, limiting the liquidity of the investment.

Comparing Children's Mutual Fund with Other Savings Scheme like FD, PPF, Sukanya Samriddhi?

Investment Option Return Rate Average Maturity Period Benchmark
ULIP For Children (Unit Linked Insurance Plan) Varies based on the funds chosen for investment Generally 10-20 years Nifty 50 or Sensex
SIP (Systematic Investment Plan) Varies based on the scheme (generally 8% - 15%) 3-5 years, can be longer Nifty 50 or Sensex
Sukanya Samriddhi Yojana (SSY) 7.6% (as of today's date) Matures when the girl turns 21 years old Government-regulated interest rates
Debt Fund - Market Fund Varies based on market conditions (generally 6% - 9%) Varies based on the fund (generally 3-10 years) CRISIL Composite Bond Fund Index
PPF - Public Provident Fund Around 8% (varies annually) 15 years Government-regulated interest rates
Invest in Gold Varies based on market conditions No specific maturity period Gold prices
Equity Mutual Funds Varies based on market conditions (generally 12% - 15%) Generally 10-15 years Nifty 50 or Sensex
Recurring Deposits Varies based on bank (generally 5% - 7%) Chosen by the investor (generally 1-10 years) RBI regulated interest rates

Are Mutual Fund Investments Allowed in the Name of Minors?

Absolutely! Children under the age of 18 years can have a mutual fund for children opened in their name. There's no cap on the investment amount, so whether it's a small monthly saving or a generous gift from a grandparent, all can be invested in the child's mutual fund.

The child will be the sole holder of this mutual fund child plan. Unlike bank accounts, these investments don't allow joint holding. The account will be overseen by a guardian, usually one of the parents or a court-appointed individual.

What Happens When the Child Turns 18 Years?

Once the child reaches 18, the Asset Management Company (AMC) halts the investments in all mutual funds. The AMC sends a notification about this change to the registered address of the guardian and the now-adult child.

The new adult must convert their savings bank account status from minor to major. Similar changes are required for their mutual fund account, as the AMC requires documentation to change the status from minor to individual. Once the transition is complete, the new adult can resume investing in their existing folios.

Investing in Children's Mutual Funds is wise for long-term growth and future security. Regular contributions, even small ones, can make a significant difference, giving your child a head start towards their education or other financial goals. This is why investing for kids is considered one of the best investments for children.

Click here to start your investment journey today.

Disclaimer:Mutual fund investments are subject to market risks, read all scheme related documents carefully.

 Frequently Asked Questions (FAQs)

Q: How do I open a mutual fund in my child's name?

A: Opening a mutual fund for a child is quite simple. You can approach any Asset Management Company (AMC) directly or through an intermediary. The application form should be filled in the name of the minor, with the guardian's details included. Relevant documents like age and identity proof for the minor and the guardian would be required.

Q: How do you invest on behalf of a minor?

A: A guardian can invest on behalf of a minor in a child mutual fund. The guardian manages the account until the child reaches the age of majority, after which the child gains control over the account.

Q: Can I have SIP for a child?

A: You can start a Systematic Investment Plan (SIP) in a Children's Mutual Fund. This will allow you to invest a fixed amount regularly, thus building a substantial corpus over time for your child's future needs.

Q: Which is the best one-time investment plan for a child?

A: The best one-time investment plan for a child depends on your financial goals, risk appetite, and the time horizon. Options range from fixed deposits to mutual funds and government bonds. However, if you are willing to stay invested longer, equity-linked savings schemes and mutual fund child plans often offer higher returns for a one-time investment.

Q: Is a child mutual fund tax-free?

A: No, a child mutual fund is not tax-free. The earnings from mutual funds are subject to tax. However, the tax implications can be complex. If the income from the mutual funds in the name of a minor exceeds ₹1,500, it gets clubbed with the income of the parent who earns more.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.