The habits of savings, becoming financially independent, and spending wisely should be inculcated in children right from the beginning. After all, discussions with children regarding money are as important as teaching them the benefits of eating healthy food. When we talk about money, a significant part of the learning constitutes the understanding of wealth creation through efficient management of money. Of course, such conversation should not be a forced one, rather it should flow naturally so that it interests kids.

Efficient allocation of money is equivalent to investing and the best teaching methodology for anyone, in this case, is to get them to invest! One of the most popular investment avenues that offer convenience as well as the flexibility is “Mutual Funds”. Let’s explore in detail if a child can invest in a mutual fund or not.

Children Investing in Mutual Funds

Children below 18 years or minor can invest in mutual funds with the help of their parents or a guardian. This simply means that while the investment will be made in the child’s name, it will be represented by a parent or a guardian who will be required to sign off on transactions. However, it won't take away the ownership rights of the child.

The process has to be followed until the child turns 18 after which their account status has to be changed to an adult. However, the status doesn’t change automatically. One has to send clear communication to the official fund house. Also, till the account falls under the minor’s category, any tax arising from receipt of dividends or redemption will have to be paid by the parent or guardian. All dividends or income in the name of minors will be clubbed with the income of parents or the designated guardians for taxation purposes. Hence, while the child is the owner of the funds, he doesn’t have any legal responsibilities.

Which Mutual Fund Schemes are Available for Investment to a Child?

As one explores the right scheme for investment in mutual funds, similar is the procedure for investment on behalf of children. The interesting part is that a minor can invest in any mutual fund scheme available for adults. Also, some schemes are specifically designed for children which are usually categorized as “Hybrid” or ‘Child Care Plan’ or ‘Children’s gift fund’. These schemes are typically structured as a mix of fixed income securities and equity with significant exposure of 60 per cent-70 per cent in equity stocks.

Usually, when one is investing on behalf of their child, they do not need money urgently. While one may choose a hybrid portfolio of debt securities and equity, it’s better to choose a good quality pure equity scheme if you have at least 7-10 years before you need the money. This is because the risk-return trade-off over long-term duration is better inequities.

It is important to understand that investment in mutual funds in the name of your child doesn’t only give the good number of years to make a balanced portfolio and have a cushion against the systematic risk, but also it is one of the best ways to make your child understand the concept of financial independence and investment.

Documents Required for a Minor

Two important documents are required for opening a minor's mutual fund folio. Firstly, a document that establishes the relationship between the child and the guardian is mandatory. If the guardian is a parent, the birth certificate or any such document mentioning the name of the parent is sufficient. In the case of someone else, a copy of the court order is essential. Secondly, a minor's birth certificate or proof of their age is required. Additionally, the minor's parents or the guardian will have to be KYC-compliant as per the regulations. Once the minor turns adult, the entire KYC process will have to be run in her name.

In cases where one needs to change the guardian, a no-objection certificate (NOC) will be required from the current guardian in addition to a court order appointing the new guardian.

While choosing a scheme, go for the one with a long-term track record of performance consistency. Starting the investment journey of your child early in life is the best lesson you can teach them.

The author is Senior Vice President, Master Capital Services

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.