Investing for your child’s future: Are mutual funds a good option to consider?

Securing your child’s future is a top area of priority for every parent and financials have a major role to play in this journey. Responsible parenting goes well beyond providing for their immediate emotional and financial needs. It is also about planning your investments right so that you set them up for long-term financial success – a large majority of parents set aside funds for higher education, marriage and even provide their children with an asset like a home when they grow older.

But what kind of investments should you make? What if you don’t have a large lump sum to set aside for the child’s future? Should the investment be in an aggressive or conservative asset class? A strategic way to achieve this is by investing into Mutual Funds in your child’s name right from when they are very young. Starting early allows your child’s investments to reap the gains from the power of compounding which mutual funds offer. Here, the returns that you make on your investment earn you more money over time as they get reinvested. So, the longer you stay invested, the more you stand to gain.

Another big advantage is that this helps foster a feeling of responsibility and value of money in children. Certain families invest the money children get on birthdays, festivals, etc into Mutual Funds. When the child sees this, they learn the importance of investing. In fact, introducing your child to investing can foster financial literacy from a very early age.

In Episode 6 of Mint Money Shots, presented by Invesco Mutual Fund, Deputy Editor at Mint, Neil Borate, decodes how you can invest into Mutual Funds in the name of minors. Watch the video below:

Step 1: Getting the essential documentation in place

The first step towards making any investment is getting the documents in order and the same applies to a Mutual Fund investment for children. In case of minors, the documentation will also include proofs that establish your relationship to the minors as their parents/ guardians. The following are the documents you must have ready:

• Proof of Relationship: Birth certificate or legal document showing the relationship between the guardian and the minor.
• Valid Bank Proof: Bank account details of the minor or a joint account with the guardian.
• PAN and KYC of the guardian.

Step 2: Selecting the investment method

Once the documents are handy, you need to select the investment mode that works for you. “Mutual fund companies allow you to invest both online and offline. You can select the method that is better for you,” said Borate.

In case you decide to make an offline investment,

• you would need to visit the nearest branch of the Asset Management Company (AMC) that you have picked.
• There, you would need to submit all the necessary documents (mentioned in Step 1 earlier), along with other identification proofs required by AMC.
• Then, simply fill out the mutual fund application form with the minor’s details.

For those who prefer an online investment, this can be done right from the comfort of your home.

• All you need to do is visit www.mfuindia.com and click on “Open eCAN Instantly.”
• Enter your contact details and create a new form.
• Fill in all the required details – these normally are information fields about the minor and the guardian and would also include bank details.
• Next, you will be prompted to upload the required documents and you are ready to submit the form.

Step 3: Setting up a Mutual Fund login with your CAN

Post-submission, you will receive a Common Account Number, also known as CAN. This is a unique identification number assigned to every mutual fund investor by Mutual Fund Utilities (MFU), which works across different investments and for different fund houses. You need to use this number to create a login ID on the MFU portal to start investing.

Through this login, you can invest into different mutual fund schemes offered by different fund houses for your child, making the entire process simpler as you don’t need to fill out separate forms. You can also view all your investments in one place, making it simpler to keep a track of your portfolio.

Some important considerations

Borate also enlisted some important points that every parent investing in the name of his/her minor children must keep in mind:

• “You should be aware that ‘Purchases’ can only be made from the minors bank account, the guardian’s bank account or a joint bank account between the minor and the guardian
• ‘Redemptions’ funds will only be deposited into the minor’s bank account or a joint bank account between the minor and the guardian registered in the folio,” said Borate. Furthermore, he explained that the minor shall be the first and sole holder of the mutual fund account. There shall not be any joint holder in cases where the minor has been made the first holder.
• The guardian in the folio acting on behalf of the minor should either be a natural guardian (which is the child’s father or mother) or a legal guardian appointed by a court of law.

Another important aspect of any investment is taxation. In cases where the investments are in the name of minors, all tax implications will be considered under the guardian’s income until the children turn 18 years in age. “Upon the minor attaining the status of major, the minor in whose name the investment was made, shall be required to provide all the KYC details and updated bank account details including cancelled original cheque leaf of the new bank account. No further transactions shall be allowed till the status of the minor is changed to major,” Borate explained.

All in all, mutual funds can be a great option to consider for your children’s future financial planning. There are several types of mutual funds available for children. You can select the one that aligns with your overall investment goals and risk profile.

(Disclaimer: Mint Money Shots is an editorial series, presented in partnership with Invesco Mutual Fund)