“Failing to plan is planning to fail.” – Benjamin Franklin
Summary:
- Rising cost of education means we must plan to meet the expenses for our child’s education.
- The first step is to fix the financial goal. We must ascertain how much money we will need and when will we need it. We can then calculate how much we will need to invest.
- Due to behavioural and tax efficiency, it might be a good idea to invest in your child’s name.
- For investing on behalf of your child, fulfil KYC requirement. Also, better to open a bank account in your kid’s name under your guardianship.
- Depending on investment time horizon, choose suitable mutual fund schemes. Also invest systematically.
Recently I met one of my former colleague. He was very happy. The reason was that his daughter was selected for undergraduate studies in a US university. While his daughter got a good portion of her fees waived, still it would be quite expensive. Thanks to some prudent investments, my friend is in good position to meet all the expenses.
The trend of going abroad for higher studies is catching up. It is expensive but a good education has the potential to change life. Benjamin Franklin was not far from truth when he said,” An investment in knowledge pays the best interest”.
Cost of education in India is rising at a fast pace as well. I wrote earlier on
rising cost of college education in India. The best gift parents can give their kids is quality education. This is expensive and requires careful planning. I try to answer a few questions in this regard.
The first step – what’s your financial goal?
Before starting your journey, you need to first decide where you want to go. When you are looking to invest for your kid’s future, you need to answer the following questions:
- How much money will you need (take inflation into consideration)?
- When will you need the money?
- How much you can invest now and on a monthly basis?
Once you have the answer to above questions, the next step is to choose the right investment, plan and start execution of the plan.
What are the available investment options?
Whether an investment is suitable for a particular not depends on your investment time horizon and risk appetite. If you need money within a year, irrespective of the risk appetite, fixed income investments (like fixed deposit, liquid mutual funds).
In my view, mutual funds are quite versatile financial instruments. These are tax-efficient, cost-effective and provide lot of options. So, whether you need money in 1 year or 10 years, whether you are risk averse or aggressive, you can choose a mutual fund scheme, that will be suitable for your purpose. Hence, I prefer mutual funds for most financial goals.
Can we invest in mutual funds on behalf of minor child?
Absolutely! In fact, it is advisable to invest in kid’s name due to behavioural and financial reasons. When we invest in our kid’s name for a specified purpose, we are less likely to disturb that investment. From taxation perspective, also, investing in kid’s name could be beneficial. If you need the money after the kid turns 18, income/capital gain from investments in your kid’s name is no longer clubbed with your income. So, most of the capital gains can be tax free. So, there is some scope for tax benefit. I also feel that if your kid is around 12-13 years of age, it could be worthwhile to invest his name and generate tax free returns when he/she turns 18.
Pre-requisite for investing on behalf of a child
When you are investing in your child’s name, you need to fulfil ‘know your customer’ (KYC) requirement. Few things that need to be done:
- Complete KYC requirement furnishing your PAN and other details. You can check if you are already KYC compliant
here. If you are not you need to complete this. - It’s best to open a bank account in child’s name under your guardianship. You can use this bank account for mutual fund transactions.
Finally, what should be the mutual fund investment strategy?
Based on what corpus you are looking at and how much time you have:
- You can use combination of small, mid and large cap funds if you have more than 5 years of time.
- If you have less than 5 years, you can go for asset allocation fund or hybrid funds.
- If you have less than 3 years, may be just go with liquid or ultra-short term debt funds. Always go with debt funds which have high quality instruments and good track record.
- Finally, always invest in a systematic manner, either through systematic investment plans (SIP) or systematic transfer plans (STPs). All of us know about SIP. You can learn about STPs
here.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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