No joint holding in minor's mutual fund portfolio

What are the benefits and disadvantages of investing in mutual funds in my minor daughter's name?

- K Rama Krishna,

As per the existing provisions, the minimum age to invest in mutual funds is 18 years. There is no restriction on the upper age to invest in mutual funds in India. However, parents or legal guardians can invest in mutual funds in a minor's name who is under 18 years. The minor must be the sole holder of the mutual fund folio or account.

Joint holding is not allowed in a minor's mutual fund folio. While planning for their child's future, some parents invest in mutual funds in the minor child's name. This is an investment goal for the child's higher education. They will invest in the minor's name instead of the parent's account to avoid misuse of the funds for other allied purposes as they tend to fritter the invested amount or funds away.

Investing in a child's account may always evoke sentiment and ingrain financial discipline, thus achieving their monetary goals. To outperform the benchmark is a mutual fund scheme's first and foremost important factor. Hence, parents may consider investing in mutual funds to take care of their children's future expenses.

Apart from core mutual funds, AMCs like Aditya Birla, Axis, Franklin, HDFC, ICICI, SBI, Tata, UTI etc., offer child plans. Aditya Birla Sun Life Bal Bhavishya Yojna, Axis Children's Gift Fund, Franklin's Children's Asset Plan, HDFC Children's Gift Fund, ICICI Pru Childcare, SBI Magnum Children's Benefit Fund, TATA Young Citizens Fund, UTI Children's Career to name a few.

However, these child plans come with a mandatory lock-in period of five years or until the child becomes a major, whichever is earlier. Anyhow one must have an investment horizon of a minimum of five years to 10 years or longer, especially for equity mutual funds. However, these tailor-made investment plans help investors to save up for their child's education and other essential expenses.

Children's mutual funds best suit parents who want to secure their child's financial future. Child plan mutual funds are tailor-made and customisable. Since these funds fall under the tax exemption category, parents looking for tax savings as one of their goals can invest in these funds. As mentioned, child plan mutual funds come with a minimum lock-in of five years, and AMCs will levy a penalty for premature withdrawals.

Hence, parents with a long horizon and willing to stay invested for a minimum of five years or more may opt for child plan mutual funds. All income, including dividends and capital gains arising from the Mutual Fund investments made in the minor's account, will be clubbed with that of the parent or the legal guardian. As per the existing provisions of the Income Tax Act 1961, such income from investments in the minor child's name will be taxable at their peak applicable tax rate in the hands of the parent or legal guardian with whom the minor's income is being clubbed.

The day the minor child attains majority or turns 18, the parent or legal guardian must submit a request to the Mutual Fund AMC or CAMS to change the status from minor to major. After attaining the majority, the sole account holder will bear the tax liabilities on a pro-rata basis for the number of months for which the minor child is a major in that financial year.

The number of documents required for investing in children's funds may cause worry and confusion to parents or legal guardians, including date of birth to proof of their relationship with the child. Also, some additional documents of the minor child must be submitted at the time of attaining majority and at the time of redemption.

Similar to stocks, Mutual Funds are associated with risks and returns since all equity and equity-related instruments, including mutual funds, are vulnerable to market risks. One must have a long-term investment horizon of 10 years or more for financial goals like a child's education and must start investing in mutual funds early.

Further, the chosen mutual fund schemes must generate lucrative returns, and one must select the mutual fund scheme to suit their risk-bearing ability. Like any other mutual funds category, past performance of child plans may not guarantee future returns. Hence, parents must seek help from investment advisors to thoroughly analyse a fund's historical performance. Financial experts and advisors will have the knack for identifying mutual funds with consistency in generating lucrative returns. Therefore, always look for funds that have performed well across different market cycles.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)