Investing for Kids: The True Cost of Education: Why You Can’t Afford Not to Invest for Your Kids

Parents A and C achieved the desired outcome, which will help them finance their children’s higher education expenses, but parents B and D are struggling to achieve the outcome due to the delay in investment. Therefore, it is never too early to start planning your long-term commitments.

Let’s also talk about whether minors can invest in mutual funds.
Chirag Municipality: Yes, a minor can invest in mutual funds, but only with representation from a legal guardian or one of his or her parents. The minor must be the sole account holder and it cannot be a joint account, and since a minor is not allowed to make financial decisions on his or her own, a parent or guardian can act as custodian of the minor’s account. The guardian must be a natural guardian (i.e., a parent) or a legal guardian appointed by a court. However, there are a few points to keep in mind:

1. KYC Requirements: Documents such as proof of relationship, birth certificate of the minor, and bank account are required. The bank account can be the minor’s account, the guardian’s or parent’s account, or a joint account.

2. For the investment of funds, the money may come from any of these accounts, as long as they are registered in the minor’s folio. For the withdrawal of funds, the money will only be paid into the minor’s registered bank account or into a joint account with the guardian that is registered in the folio.

3. Implications when a minor turns 18: When a minor becomes an adult, the guardian or parent must update the account status from minor to adult and restart the KYC, or else all operations on the account will be stopped. Once the account status is updated, it will start functioning normally and the minor can handle his or her investments independently.

4. Tax implications: Until the minor reaches the age of majority, all earnings earned in the minor’s account will be included in the parent’s income for tax purposes, and taxes will be borne by the parent. Once the minor turns 18 and the account status is updated, the minor will be treated as a separate entity and will be responsible for paying taxes on his or her own.

Could you also explain to us where to invest the money?
Chirag Municipality: Child retirement and endowment funds are popular solution-oriented options, offering portfolios across equity, debt and hybrid categories. These funds come with a mandatory SEBI lock-in period of five years or till the child turns 18, whichever is earlier. As of June 2024, child funds managed over Rs 20,000 crore in assets.

Insurance companies also offer life insurance plans for children, which have a longer tenure period and higher expense ratios. Also, government schemes like Sukanya Samriddhi Yojana focus on the financial future and well-being of children. Some of these investments offer tax deductions under Section 80C and have a tenure period till the child turns 21 years of age.

What about the performance of these child-oriented funds?
Word: The data shows that solution-oriented funds and similar categories have underperformed diversified equity funds, which have a better track record of generating alpha. Diversified equity funds offer investors the flexibility to allocate assets across categories and market capitalizations based on their risk profile and investment horizon.

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We recommend that investors choose diversified equity funds and spread their investments across different categories, market capitalisations and asset management companies to reduce concentration risk. Over the long term, in equity markets, the relationship between risk and return tends to be inversely proportional: returns increase and risk decrease over time.

Disclaimer: The recommendations, suggestions, views and opinions given by the experts/brokers do not represent the views of Economic Times.