Direct Mutual Funds: Parents' Savvy Choice for Child's Future
Overview
Parents are increasingly opting for low-cost direct mutual funds to secure their children's financial future, bypassing costly insurance-linked schemes. This strategy offers potentially higher returns through compounding and greater control, despite tax implications where income is clubbed with the parent's bracket.
Direct Funds Offer Lower Costs
Parents looking to invest for their child's future are often steered towards insurance-linked "children's plans." However, a more financially prudent route lies in direct mutual funds, which carry significantly lower expense ratios. Over a decade or more, this cost advantage translates into substantial gains due to compounding, making them superior for long-term goals like higher education.
Guardian Role is Key
Under Indian law, minors cannot directly own or operate mutual fund accounts. Investments are registered in the child's name, with a parent or legal guardian managing the folio. This guardian is the sole controller of the account until the child attains majority at 18 years old. The process requires the child's basic documents and the guardian's complete financial credentials, including PAN and KYC.
Tax Implications to Consider
Income generated from investments made in a minor's name is typically clubbed with the income of the parent in the higher tax bracket. This rule applies subject to a small annual exemption limit. Therefore, investing in a child's name does not inherently provide tax savings but rather facilitates disciplined, goal-oriented investing.
Transition at Majority
Upon reaching adulthood, the mutual fund folio undergoes a "minor to major" conversion. The child must complete their KYC, provide PAN and bank details, and sign necessary documentation. This transition is also an opportune moment to educate the child about personal finance management.
