Investing for your child v/s Investing in your child’s name
- Navin Punjabi, Assistant Professor & Director Placements H R College of Commerce & Economics, Mentor Board of Industry-Academia Partnerships
Disclaimer – The view & opinions expressed in this article are personal and do not reflect the views of the authors employer or any other institution that the author is affiliated to. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Mutual Fund investments are subject to market risk. Please read all offer related documents carefully before investing.
The earliest & fondest memory of money is when our grandparents would give us a 100 rupee note & we would put it in a piggy bank. However, when we asked for the money to be removed from our piggy bank we would be explained the concept of savings and be told that you will get the money back once the piggy bank is full. The concept of piggy bank was introduced to inculcate the habits of savings in children. However, none of us were introduced to the concept of investing at an early age.
With changing times, one needs to inculcate the concept of savings and investment at an early age and explain the difference between both, savings and investments. One could teach the concept of investment by asking the child to use 50% of the piggy bank money to buy a gift of their choice game, colors etc a fun thing of their choice and 50% of the money be invested in a financial instrument. The child can be taken as a visit to a bank and taught the principles of banking & finance like fun activity. Schools may also include this as part of their field trip at an early age so that they develop interest in finance and don’t consider it boring at a later stage in their life.
One of the biggest financial goal for any family is fulfilling aspirations of their children. Whether it is buying a new house so the child has a separate room, or buying a car or planning the child’s education in India or abroad, when it a matter of the child’s future, parents strive for the best.
The two broad approaches for minor investments for children are:
- Investing for your child
- investing in your child’s name:
Investing for your child means the investments are made in the parent’s name in regular financial instruments namely fixed deposits, mutual funds, shares, property etc. However, the goals for which the investments are made are for the children.
Investing in child’s name is where the holdings are invested in the child’s name and the parents act as guardians. The documents needed for registering the minor, are documents such as Birth Certificate, Passport copy and other documents which help evidence a relationship between the minor and guardian. In all investments, the investments must be held solely in the name of the minor child and no joint holders are allowed. One must also note in such case nominations are not permitted as per rules. The guardian must be a parent or legally appointed guardian. However, once minor children become major, the management of the investment passes into their hands and the parents have little control on how the funds will be used.
The bank account through which the payments for the investment will be made, and the credits received, can either be in the name of the guardian or in the name of the minor under guardianship. If the payment is routed through the minor investor’s bank account under guardianship, then a declaration from the bank manager may be required to certify the details of ownership of the bank account. Irrespective of the source of payment, the ownership of the investments will lie with the minor investor.
When minor is attaining major one should keep in mind the following procedure:
- Minor attaining Major: Once a minor attains majority status i.e. becomes 18 years of age, the investor has to apply for a change of status in the investment. All the investment formalities such as PAN and KYC will now have to be complied with by the till-now minor investor. Her signature, attested by the bank manager, will replace that of the guardian in the investment records, and the new bank account details have to be provided for all future credits and debits related to the investment. Typically, an investment made in the name of a minor cannot be operated by the guardian once the minor becomes a major. Facilities such as standing instructions in bank accounts, systematic investment and redemption plans and others will be registered only till the date when the minor investor attains majority.
- Taxation: Even if the investment is held in a minor child’s name, clubbing provisions will mean that any income will be liable to payment of tax by the parent. In addition, there’s another tax advantage. If the parents invest in a taxable investment in the name of the child, they can claim an annual exemption of Rs 1,500 per child under Section 10 (32) of the Income Tax Act, 1961. Say, the interest income in a year is Rs 6,500, the parents can claim exemption up to Rs 1,500 and add the balance of Rs 5,000 to their income.
- Should minors invest in Mutual Funds? The minor and guardian must understand the reason for investment. Their risk appetite, desired return, and long term or short-term strategy, along with helping the money grow and become useful for the minor when he attains major status; all these factors must be taken into account. Once all these factors are weighed out, the ideal fund should be identified and then if the aims align with the fund, yes, the parents should invest in mutual funds for the minor, so as to avail tax benefits, extra income and boost long term financial stability.
Mutual Funds are beneficial to an economy and to the people investing in them, if they are run with integrity and efficiency, and with the current state of India’s economy, everything seems to be on the rise. Mutual Funds Investments are here, and they are here to stay, and you must educate yourself on their benefits, minor or otherwise.
To conclude, one has to make a decision whether to invest in one’s own name or investment in the child’s name to create a corpus for the minor child. One needs to keep in mind the control, paper work, tax point of view, any income that gets generated will anyway get clubbed with that of the parents. And then accordingly the tax has to be paid. Therefore, evaluate the need to invest and then decide, keeping emotions aside. Emotions usually takes precedence in case of minor child and one needs to understand the practicality and the objective of investments.