Talking to your children about money is as important as talking to them about the benefits of healthy eating and exercise. This needn’t be a forced conversation, rather an understanding that flows naturally. A part of this learning is also understanding wealth creation through efficient allocation of money.
Or in other words, investing. The best way to teach anyone about this is to get them to invest!
Mutual funds offer the most flexible and convenient form of investment for wealth creation, but can children also invest?
Children investing in MFs
Children below 18 years can invest in mutual funds through a parent or a guardian. What this means is that the investment in a mutual fund scheme will be made in the child’s name but with representation from the parent or a guardian. The child will be the account holder and owner of the mutual fund scheme, the parent or guardian is the person required to sign off on transactions.
This remains the case until the child turns 18, after which the minor account holder status has to be changed to an adult. This requires clear official communication to be sent to the fund house. Till the account is operated by the parent or guardian, any tax arising from redemption or receipt of dividends will have to be paid by the parent/guardian.
The child or minor does not have the responsibility to pay this. Hence, while the child is the owner of the scheme, all legal responsibilities lie with the parent guardian.
A minor or a child can invest in any of the mutual fund schemes available to an adult as well.
Where to invest
There are a few mutual fund schemes named as ‘children’s gift fund’ or ‘child care plan’ or a similar nomenclature with the word child or children in it. However, these aren’t the only schemes your child can invest in. A minor or a child can invest in any of the mutual fund schemes available to an adult as well.
The specific schemes mentioned above are typically structured as a mix of equity and fixed income securities with primary exposure of 60%-70% in equity stocks. Usually, when you invest in a child’s name, you have at least a few years before you need the money. You may choose a hybrid portfolio of equity and debt securities, but if you have at least 7-10 years before the money is to be used, it's better to choose a good quality pure equity scheme as the risk-return tradeoff over this long term duration is better.
Choose schemes with a good long-term track record of performance consistency rather than looking for the best performer within the equity category. Let your child invest in this regularly through systematic investment plans or SIPs.
Starting their investment journey early in life is the best gift you can give your child to be prepared for what the future holds.