As a parent, it’s very important that you make your child understand the importance of investing and drafting a financial plan. After all, you want them to be financially independent in their life. Thus, explaining them about to build their financial health is equally important as mental and physical health. The best way for them to understand about investing would be getting them invest on their own. However, can children invest in mutual funds? Read on to know more.
Can children invest in mutual funds?
If a child is below 18 years of age, they can invest in mutual funds through the guidance and help of their parents or legal guardians. This means that though the investment in mutual funds would be under the child’s name, it would be represented by the legal guardian or parents. As a result, though the child would be owning the mutual fund units, the transactions would be signed off by the legal guardian or parent.
This process would go on until the child attains 18 years of age, after which he would be considered an adult and the same shall be reflected on his account holder status from minor to adult. A clear official communication needs to be sent to the AMC (asset management company) or the fund house. Parents and legal guardians must note that till the investment accounts are operated by them, they would have to pay the tax component arising on capital gains of mutual fund investments and the child won’t be liable to pay them.
What types of mutual funds can a child invest in?
There are several mutual fund schemes such as child care plan or children’s gilt funds or similar mutual fund schemes that specifically cater to a child’s investment needs. However, one must note that they are not bounded to invest in just these schemes. A minor can invest in any type of mutual funds that is available to an adult.
Mutual fund schemes such as children’s gilt funds or child care plan are structure with a mix portfolio of equities and fixed income securities. The asset allocation of equities is greater around 60 to 70% of the total assets of the portfolio. You might choose a hybrid fund scheme that offers both equity and debt instruments. However, if you have a long-term investment horizon of ten years or more, it is advised to choose schemes that expose a high proportion of their assets towards equites as they can largely help in wealth creation.
An investor must choose mutual fund schemes that enjoy a long-term track record of consistent and significant returns over different market cycles – bear market and bull market. Just like an adult, a child can choose to invest in mutual funds either through a systematic and regular way of investing provided by SIP mutual funds or a one-time investment offered by lumpsum investment.
The best gift you can give your child is a secured future, Mutual funds can help them achieve financial independence. Happy investing!