Can you invest in mutual funds in your child’s name?

Opening a mutual fund in a child’s name by way of investment can be a good way to secure their financial future.

Can you invest in mutual funds in your child’s name

Every parent aspires to fulfil the financial needs of their children so that all the expenses that can arise in the child’s growing years can be managed. They generally go for options with a long investment horizon, like the sum assured and benefits under life insurance plans and money-back plans, fixed deposits, gold and PPFs, to fulfil such obligations. If you are looking for options for investing for children, a mutual fund scheme can be a good alternative to conventional saving instruments.

While the market pattern and time is important in deciding which is the best investment plan for children, we offer a few options within mutual funds that can secure your child’s future. But before that, let us look at how you can start the process of investments in the name of your child.

Starting an investment in your child’s name 

Many parents invest in mutual funds in their name, while keeping the child as a special nominee. But investing in a children’s mutual fund should be done by opening a bank account and a mutual fund account in the child’s name. 

Related: Using mutual funds to plan for and fund your child’s education

Minor bank account

The parent is generally the joint holder of such a bank account and the KYC of the parent as well as the minor is required. Apart from the birth certificate of the child and a photograph, the address, ID proof, and PAN of the parent/guardian is required, along with a photograph. A bank account in the name of the minor child may have lower withdrawal limits to avoid overspending. This bank account can be used to invest in the children’s mutual fund of your choice.

Minor mutual fund account

A mutual fund account meant for a child is maintained in the name of the child alone. Though the child will be the first and only holder of the mutual fund account, either the parent or a legally appointed guardian can be the custodian of the account.

To open your child’s mutual fund account, you will be required to furnish the proof of age of the child, and a relationship proof. A birth certificate with the parent’s name will meet both these requirements. A passport in the name of the child would also serve the purpose. In case the custodian is a legal guardian, a copy of the court order authenticating the legal appointment will be required. KYC of the custodian parent will also be required. This is a SEBI requirement.

Related: Opening a PPF account for your child? Here’s what you need to know

Change of custodian

In the event of a need to change the custodian parent/guardian, a no objection certificate from the existing custodian is required. A fresh KYC compliance of the new guardian will be required to be done. The court order requirement will be applicable as well, in case a legal guardian becomes the new custodian.

Taxability of children’s mutual funds

Under the Income Tax Act, all income of a minor is clubbed with the income of the parent or guardian and taxed accordingly. The income of the minor who holds a mutual fund account can be in the form of dividend or capital gains on the sale of the mutual fund units. Once the minor attains the age of majority, the subsequent income and profit from the mutual fund will be taxed as a part of the minor’s income. 

Considerations while investing in children's mutual funds

Children's mutual funds generally have a lock-in period of a few years, or till the child reaches 18 years of age. This is done to discourage partial withdrawals and short-term exits from these plans, which are begun with the intention of developing the saving habit and meet specific long-term goals of the child. 

As an investor, you have to select a fund scheme that provides you with the required balance of investment in equity and debt. Equity-oriented funds are known to provide high and stable returns in the long term, say 10 years and above. So if you have a longer time horizon, equity mutual funds are likely to provide you with better returns. However, if the child’s financial goal needs to be achieved in a few years, it is better to go for a debt-heavy fund. Debt funds offer higher capital protection through major investments in fixed income instruments.

If you wish to maintain a SIP for children, you should aim to increase the SIP contribution over time. The initial SIP contribution would be based on the income of the parent at the time of fund account opening. However, as the income increases, the contribution to the SIP should simultaneously increase.

Selected children's mutual funds

Here are some children mutual fund schemes that have performed well as of 7 May 2021.

Scheme name AuM (Cr) YTD ROI% 3 years average ROI% 5 years average ROI%
UTI CCF- Investment Plan - Direct Plan - Growth Children’s Fund 452 8.2 11.9 21.2
HDFC Children’s Gift Investment Plan - Direct Plan Children’s Fund 4270 8.1 13.1 20.1
UTI CCF- Investment Plan - Growth Children’s Fund 452 7.8 10.7 19.5
HDFC Children’s Gift Investment Plan Children’s Fund 4270 7.8 11.9 18.3
Axis Children’s Gift Fund - No Lock-in - Direct Plan-Growth Children’s Fund 575 4.3 13.3 17.0
Axis Children’s Gift Fund - Compulsory Lock-in - Direct Plan-Growth Children’s Fund 575 4.2 13.2 16.7
SBI Magnum Children’s Benefit Fund - Savings Plan - Direct Plan-Growth Children’s Fund 74 2.9 8.1 15.3
Tata Young Citizens Fund - Direct Plan-Growth Children’s Fund 228 9.3 10.6 14.9
ICICI Prudential Child Care Fund - Direct Plan - Gift Plan Children’s Fund 741 5.8 9.2 14.3
Axis Children’s Gift Fund - Compulsory Lock-in - Regular Plan - Growth Children’s Fund 575  3.8 11.3 14.1

Related: Here's how you can open a bank account for your child

Mutual funds can help a parent to build their child’s future and achieve long-term financial goals, like marriage and higher education. However, such investments should be part of a bigger financial plan and diversified as per the risk appetite of the investor. Naturally, it is important to study the fund scheme thoroughly and monitor its performance from time to time. Child insurance: How to make sure your child gets funds at the right time


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