Mutual Fund for Child - How to Select the Mutual Fund for Your Kid' future

Published On: 06-May-2020

Mutual funds offer a wide range of investment options to the investors, to suit different risk profiles, investment horizon, and financial goals. An investor may choose to invest in equity schemes, debt schemes, hybrid schemes, solution-oriented schemes, index funds, etc. as per their financial plans. One of the primary financial goals for a parent is planning for their child’s education. With high emotional value attached to this goal, one always intends to plan the best for his/ her children. 

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Investment in the name of Minors

For such goals, one may choose to invest in their own name or in the name of their minor children. If the investment is being made in the name of minors, the payment is accepted from the bank account of the minor or from a joint account of the minor with the guardian only as per the SEBI Regulations. Upon the minor attaining the status of major, the minor in whose name the investment was made is required to provide all the KYC details, updated bank account details including cancelled original cheque leaf of the new account. No further transactions are allowed in such accounts till the status of the minor is changed to major. 

Planning for the Education of your Children

Planning towards the education of children may generally be classified as medium to long term financial goal depending upon when one starts investing. Here is how one may adopt a systematic approach towards this financial goal:

Calculate the Current Costs

This is the first step in planning for any financial goal. While one is quantifying the goal, one must research about different career options for the child based on his/ her inclination to various subjects. If one starts during the early years of a child’s life, one must estimate a reasonable sum towards the education goals. Such amount may be reviewed at a later stage as and when the circumstances arise. 

Adjusting the Costs for Future 

Once the current costs are estimated, one must adjust it for the expected inflation over the period. In other words, the goal should be based on the expected education costs in the future, instead of the current costs. For example, if an educational course presently costs Rs. 15 lakhs, such costs will amount to around Rs. 48 lakhs after 15 years, assuming 8% inflation. 

Choosing the Right Investment 

Once one has decided to start investing, it is paramount to choose the right vehicle to reach the destination in time. Since saving for education generally comes with long term investment horizon, one may invest in equity funds to reap the benefits of long-term wealth creation potential of equities. Better returns over the investment period enable the investor to achieve the desired financial goals with a lower investment per month. Such savings may be channelised towards fulfilling other financial aspirations if required or enhancing the corpus toward existing financial goals. 

The investments must also match the required investment horizon. While equities may be highly desirable for long term financial goals, it may not be advisable to invest in equity funds for short-term goals. This is because equities tend to be volatile over the short term. So, if one starts investing late for their financial goals, they may not only have to shell out a higher amount to compensate for the lost period but also may have to be content with lower returns. 

Given the different investment considerations, one must adopt a systematic approach to invest in the right mutual fund scheme for their children. This allows the investors to accumulate the desired corpus in a time-bound manner, and one may not need to restrict his/ her child’s dreams and aspirations due to financial reasons.