Is it a good idea to invest in your child’s name?
One of the biggest financial goals for most parents is to make sure that their children are taken care of- whether its education, marriage or any other need. These goals require a lot of money and so many parents want to start planning when their kids are still very young. Mutual funds are definitely a great investment option for such parents. There are some child plans which are designed specifically for this. These products encourage a forced discipline through higher exit loads and an option to lock-in the money till the child turns 18.
But what if you want a little more flexibility to choose from a wider range of funds without limiting yourself to one plan? There are two ways in which you can make mutual fund investments for a minor child. One is to hold it in your name with an implicit understanding that you will not use the money from that investment for anything else. The other way is to hold the investment in the child’s name.
Investments in the name of the child:
Investing in your child’s name requires you to establish the relationship between the minor and the guardian along with a proof of age for your child. Since, the guardian has to be one of the parents, the birth certificate should be good enough for both these requirements. The guardian will need a PAN card and should be KYC compliant. You can either open a separate bank account in the name of the child or the guardian can make the investments directly from their own bank account. Remember, the minor’s investment cannot have a joint holder or a nominee and the ultimate ownership of the investments lies with the minor investor. So the day the minor turns 18, the investments can only be managed by them once they are KYC verified.
Investments in the name of a parent:
On the other hand, investing for your child but holding the investment in your own name is pretty straight forward. The investments are in your name and you manage them. Like for any other investment, you just have to be KYC verified. You can add your child as a nominee or a joint holder if you want to.
So, what’s the best way to invest for a minor child?
1. Taxation: When it comes to taxation, there is no particular tax advantage in holding an investment in a minor child’s name. Any capital gains from the investment will have to be clubbed with that of the higher earning parent and taxed accordingly. Any gains made after the child has turned 18, will be taxed as per existing tax regulation at that point of time. Currently, only the short term capital gains from debt funds are taxed at slab rate while long term capital gains from both equity and debt funds are fixed irrespective of your slab rate.
2. Flexibility: The argument against investing in the name of minors is that it takes away your flexibility. You may have less control on how the funds are utilized once the child becomes a major, since the money will be paid out to the child’s account and they will have complete control over how they want to use it. And you will have no control over how they want to use their funds.
3. Clarity: If there is gift money coming into your child’s bank account from other family members, investing in your child’s name can help keep things simple and clear.
4. Emotional Comfort: You can choose to make the investment in your child’s name if it makes you feel good about doing something for your child. It will give a clear focus to your investment and you might be less likely to pull out from it for other purposes. However, if you have the discipline to remain invested for your goal, it does not matter if you hold the investment in your own name or in your child’s name. When you invest with us, you can customise the name of the portfolio so that it helps you earmark the money based on your goals. That should give you all the clarity and motivation you need to stay invested.
You can decide between the two options based on what works for you. And whatever you choose to do, start early and stay invested for as long as you can because that is what will make all the difference.
