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Investing for Children

One can make long-term mutual fund investments on behalf of children for their future needs...

I am 31-year old, and have one year old son. I want to save for my child's education through mutual fund SIPs. I learnt that investment should be a mix of Equity and Debt funds, so I want to invest in a balanced fund.I want to invest through Direct Plans for my child's education for 12-15 years.
Should I invest in my name in 'HDFC Prudence' or in my child's name in 'HDFC Childrens Gift Inv'. Please guide and let me know the tax implications too that what's the difference in taxation when I am investing in my child's name.
I want to understand how I can invest in my Child's name in 'HDFC Childrens Gift Inv' through Direct plan as my child doesn't have any PAN or Bank Account or existing Folio Number in HDFC MF. Though I have all these.

- Rahul

Investing in equity and balanced funds can help you build wealth for long-term goals. Those with low risk-appetite should consider balanced funds for long term, and benefit from the automatic rebalancing and protection of gains that these funds offer. And investing in Direct plans will be advantageous and show significant difference in gains from a regular plan, when investing for long term.

You have chosen good funds for investment and you can invest in your child's name in either of the fund. Both funds have been good performers in the past few years and have similar allocation to equity and debt.



Tax incidence for minor children falls on the parent or guardian of the child. There are two ways of investing in your child's name.

First, you can file a fresh application in your child's name that will generate his folio number. In this case you will be the guardian and the AMC will require your PAN details, bank account number and an address proof. Since the investment will be routed through your account you need to fill a Third Party Payment Declaration form and submit this along with an acknowledgement letter from the bank manager certifying that you maintain a bank account with the said bank and other relevant details (account number, branch code, account type, bank statement, copy of standing instruction to the bank in case of NEFT/ RTGS/ ECS).

Another option would be to open a bank account for your child and route transactions through that. Here again you have to furnish acknowledgement letter from the bank manager certifying you as the child's guardian and an account holder in the bank, along with other relevant details of the child's account.

Also, whatever money you invest in your child's name will be your taxable income, and since you are investing for long term in equity-oriented balanced funds, the gains will be tax-free. Long Term Capital gains tax on equity is nil.

If you withdraw the investment within a year, at this time your child is a minor, you will be liable to pay Short Term Capital Gains tax because a minor's income is clubbed with that of the parent with the higher income.

A more convenient way to go about this might to be invest in your name, since investing in child's name doesn't give you any tax benefit. However, if you want to invest in HDFC Children's gift, you can do it only in your child's name as only children less than 18-years of age can be unitholders in the fund.



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