Things to keep in mind while investing in the name of your minor child in mutual funds

Planning to invest in the name of your minor chile in mutual funds? These are the things you should keep in mind. Read my article on this ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/16052016/16052016-md-gm-10.pdf

The English translation of the article is as under:

Investments in mutual funds in the name of minors

If you look at a mutual fund application form and check the “who can invest” list, you would notice that investments can be made by guardians on behalf of minors. Many investors believe that they can start investing in the name of their minor children for the purpose of financial goals related to the children’s education or even for the purpose of transferring wealth.

While investing for financial goals related to one’s kids is a very good idea, one should also properly understand the operational, administrative and emotional aspects related to the investments.

First of all, investing in the name of the minor children has a great emotional value. It is observed that parents rarely, if at all, touch the investments made in the name of their children, except for the purpose for which these were made. Though this is emotional, and not rational, such a mindset actually helps the investor and prevents from taking money out at the wrong time. It has been observed that many investors panic when the equity markets go down in value and take money out of their equity investments. This converts the temporary downturns of equity markets into permanent investment losses. Staying invested through such periods generally turns to be a wise decision.

Second is the operational aspect. Investments made in the name of minors can be operated by the guardian, whose name is captured in the investment folio. This is based on the application form. When the minor turns major, the investment details must be changed as the guardian can no longer operate the account.

Third, there is a risk involved and parents must be aware of the same. Assume that you invested a sum of Rs. 5,000 per month since the child was 3 years old. You continued to invest the same amount till the child turned 18. If we assume investment return of 12% per year, the accumulation would be a little less than Rs. 25 lacs (this is just a calculation and not recommendation or advice. Investment returns are subject to many risks and the investor must understand the risks involved with specific investment avenues). Would you, as a parent be comfortable leaving this much money in the hands of your child, who has just turned 18? This is a decision the parents must take before they start on the investment plan.

Fourth, mutual funds do not allow a second holder or nomination when an investment is made in the name of a minor. Please consider the risk here too. In the untoward event of the child’s death before turning 18, accessing the money could be a huge operational difficulty.

Investment management is about the understanding of many risks other than investment risks. Please be aware. Always plan your investments in such a manner that you can access the same when required.

Stay informed and enjoy your wealth.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.