INVEST IN YOUR CHILD'S FUTURE: BUY MUTUAL FUNDS TODAY

Many investors struggle with financial discipline and may end up using money set aside for their child’s education or emergencies, drifting away from the original objective. Investing in a child’s name helps ring-fence a certain amount and promotes long-term financial discipline. However, some parents hesitate to do so, as they are concerned about handing over financial control once the child turns 18 and fear potential misuse or loss of control over the investments.

LIMITS LIQUIDITY

Child mutual funds generally feature a lock-in period, usually lasting five years or until the child reaches 18 years of age, whichever comes first. Most fund houses apply an exit penalty of approximately 4 percent for withdrawals made before maturity. While this lock-in period restricts liquidity, it promotes steady growth of the funds to support milestones, such as college expenses at age 18 and others. This structure encourages financial discipline and mitigates the risks associated with market timing, enabling investors to make consistent contributions without the pressure to react swiftly to market fluctuations.

MINOR AS A SOLE HOLDER

All mutual fund houses allow investments in the name of a minor (below 18 years of age) across all types of schemes—equity, debt, hybrid, gold/silver, and international funds. In such cases, the minor is the sole and first holder of the folio, and joint holders are not permitted. The account must be operated by a guardian, who can be either parent (mother or father) or a court-appointed legal guardian. The guardian manages the investments until the child attains majority, after which control transfers to the child.

DOCUMENTS REQUIRED

To invest in a child’s name, documents proving the child’s age and the guardian’s relationship with the child must be submitted.

Accepted documents include:

• Child’s birth certificate
• Aadhaar
• Passport
• PAN (which establish the date of birth and the guardian’s status -natural or legal).

These documents are required at the time of the first investment or while opening the folio. Additionally, the guardian must be KYC-compliant. Investments can be made using either the child’s bank account or the guardian’s bank account.

FINANCIAL AND NON-FINANCIAL TRANSACTIONS

All transactions—lump-sum investments, systematic investment plans (SIPs), systematic transfer plans (STPs), switches, and redemptions—can be executed by the guardian on behalf of the child. This arrangement continues until the child reaches the age of 18.

The investments can happen from either the guardian’s bank account or the minor’s bank account; however, redemption can only happen in the minor’s bank account Once the child attains majority, all existing SIPs and STPs in the folio are automatically suspended, and the guardian can no longer operate the account. The folio is frozen until the child completes the required formalities. The now-major investor must submit an application along with prescribed documents to change the folio status from ‘minor’ to ‘major’ and complete KYC requirements, including submission of a KYC acknowledgement.

TAXATION - HOW DOES IT WORK BEFORE AND AFTER THE CHILD TURNS 18?

If mutual fund units are redeemed while the child is still a minor, the capital gains are clubbed with the parent’s income and taxed at the parent’s applicable tax rates. After the child turns 18, they are treated as a separate taxpayer. Since most 18-year-olds typically have little or no other income, they can utilise the basic exemption limit—currently ₹4 lakh under the new tax regime. Additionally, they are eligible for their own ₹1.25 lakh annual exemption on long-term capital gains from equity mutual funds, making investments in a child’s name tax-efficient in the long run.

Parents of differently- abled children can benefit from additional tax exemptions if they apply for children's fund.

THE BOTTOM LINE

Investing in mutual funds in your child’s name is not just about wealth creation—it’s about building financial discipline and securing long-term goals with intention. While the lock-in period limits liquidity, it also protects the investment from short-term temptations and market noise. With clear rules on account ownership, transparent taxation, and the benefit of compounding over time, child mutual funds can play a meaningful role in funding education and other life milestones. When started early and managed thoughtfully, they offer parents a structured, tax-efficient way to invest in their child’s future with confidence.