Should you invest in your child's name?

Every parent desires to fulfil their child's dreams and give them a head start in life. Whether it's studying at a prestigious university, launching a startup, or a dream wedding—all goals can be secured by smart financial planning today. While equity mutual funds are a proven way to build serious wealth in the long term, a dilemma many parents face is whether they should invest in their child's name. There are both upsides and downsides to it. We have explained them below to help you make an informed decision.

The upsides

1) Tax savings: Until your child turns 18, realised gains from the mutual fund will be considered your income and taxed accordingly. However, once they turn 18, the tax liability shifts to your child. They will be required to pay capital gains tax on the investment. In case of long-term capital gains from equity funds, they will benefit from the usual exemption of Rs 1.25 lakh.

Additionally, under the new tax regime, annual individual income of up to Rs 3 lakh is tax-exempt. Since most 18-year-olds typically have no other income, they can use this exemption to further reduce their tax liability. This could save up to an additional Rs 37,500 in taxes on investment gains, which is the maximum tax savings possible under this exemption.

2) Disciplined investing: When investing in your child's name, you do more than just set money aside. This decision ensures that funds for the child's education or wedding are kept separate from your personal goals like retirement or buying a home.

Moreover, your emotional connection toward your child's future often reinforces discipline, making you less likely to dip into these investments unnecessarily.

The downsides

1) Documentation hassle: Investing in mutual funds in your child's name can be cumbersome. Many online brokerage platforms don't offer the option to open a mutual fund account in a minor's name. Moreover, only select fund houses offer the option to open an account online. In most cases, you may need to make in-person visits to branch offices of the fund houses.

To get started, you'll need the following documents:

• Proof of age for the minor: Child's birth certificate, passport, or higher secondary mark sheet of respective education boards.
  
• Proof of relationship: The guardian listed in the mutual fund must be either a natural guardian (parent) or a court-appointed legal guardian. For natural guardians, proof of relationship with the minor must be provided. For court-appointed legal guardians, a copy of the court order must be submitted.
  
• Guardian documents: The guardian must provide their PAN card, address proof, and bank details and complete the KYC (know your customer) documentation.

On turning 18, the child must also submit a Minor Attaining Majority (MAM) form to prevent their account from freezing.

2) Lack of financial maturity: When your child turns 18, they gain full ownership of any investments in their name. While it can be empowering, it is also an age where young adults tend to lack financial maturity. This may result in impulsive spending or money mismanagement if adequate financial guidance is not provided.

The bottom line

Deciding whether to invest in your child's name is a personal choice. Remember, what works for one family might not work for another. Before proceeding, consider these questions: How do you expect your child to handle financial responsibility at 18? Can you handle the paperwork hassle? Does this decision align with your family's financial planning? If not, you could always invest in your own name and use the funds for your child's needs when the time comes.

Also read: Investing under a loved one's name? Here's what you need to know