Commencing early investments for your children’s future financial objectives, such as higher education or marriage, is crucial for parents.
Financial Planning Tips for New Parents
Parents often seek to secure their children’s long-term financial stability from an early age. Here’s how new parents can embark on the journey of investing for their child’s financial future and ensure a secure financial foundation as they grow.
Obtaining Essential Proofs: Aadhaar and PAN
To initiate the process, obtaining a birth certificate is vital for acquiring the newborn’s Aadhaar ID or PAN. Enrolling for Aadhaar ID is a straightforward procedure, which can be completed at any permanent Aadhaar center. On the other hand, applying for a PAN card entails submitting the necessary documentation to the NSDL’s Pune office. These documents include proof of address, identity, and the newborn’s date of birth.
Initiating a Bank Account for the Child
Parents can either utilize their existing bank account or open a dedicated bank account in the child’s name. If the investments are directed through a demat account, a minor bank account—jointly held with one of the parents as the guardian—is mandatory. This bank account can also serve as a repository for any monetary gifts intended for the child. The process of opening a minor bank account is simple, requiring the child’s birth certificate, as well as the parent’s PAN and Aadhaar numbers for address verification. However, if the parent already holds an account with the same bank, providing PAN and Aadhaar details might not be necessary.
Investing in the Future: Mutual Funds and More
When it comes to securing a child’s financial future, investing in mutual funds (MF) can be an effective strategy. As a parent or legal guardian, one can invest in a minor’s MF account through their own bank. However, it’s important to note that the redemption proceeds from these investments will be transferred to the minor’s bank account.
Documents and Process for Opening an MF Account
To open a mutual fund account for a child, you will need to provide the child’s birth certificate to establish their age and relationship with the parent or legal guardian. Additionally, a cancelled cheque of the child’s or parent’s bank account will have to be submitted.
Personal Case: Sneha Jain’s Approach
In Mumbai, Sneha Jain, aged 36, has opted to create separate bank accounts for her six-and-a-half-year-old daughter and four-year-old son. Since her children were as young as six months, she has been consistently investing in mutual funds, which are held in their names. Jain makes monthly investments of ₹30,000 through systematic investment plans (SIPs), utilizing their respective bank accounts for each child.
Jain, who works as a wealth manager, expresses her commitment to utilizing mutual funds for her children’s long-term goals. She shares, “I have opted for equity funds – a multi-cap and a children’s fund – for each child. Equity funds have the potential to perform well over longer periods, as the impact of market-linked volatility evens out over time.” It’s worth noting that the children’s fund comes with a high exit load, which serves as a deterrent against early redemptions.
Supplementary Investment: Sukanya Samriddhi Yojana (SSY)
In addition to the MF investments, Jain also allocates ₹5,000 every month in Sukanya Samriddhi Yojana (SSY) specifically for her daughter, demonstrating a diversified approach to securing her children’s financial future.
Starting with SSY and PPF Accounts for Children’s Future
SSY Account for Girl Child
Opening an SSY account for a girl child can be initiated anytime from her birth until she turns 10. The account requires a minimum investment of ₹250, with a maximum annual deposit limit of ₹1.5 lakh. Recently, the government raised the interest rate on SSY deposits to 8.2% from 8%.
How to Open an SSY Account
The account can be opened at a bank or post office. Parents need to submit the child’s birth certificate along with their KYC documents, including PAN and Aadhaar. Deposits can be made for 15 years, and the account matures 21 years after opening. If the girl marries before 21, the account will be closed.
Public Provident Fund (PPF) for Children
Similar to an SSY, parents can open a PPF account for their children. A minimum deposit of ₹100 is required, with an annual contribution ranging from ₹500 to ₹1.5 lakh. The current interest rate for PPF is 7.1%.
Benefits of PPF for Children
Starting a PPF account early provides the advantage of the mandatory 15-year lock-in period lapsing by the time the child turns 18. At this point, the child can decide whether to close or continue the account.
Tax Benefits of SSY and PPF
Both SSY and PPF fall under the EEE (exempt-exempt-exempt) tax category. This means that parents contributing to these accounts can claim tax deductions, with a combined limit of ₹1.5 lakh under Section 80C. The interest earned and the maturity amount are both tax-free.
Investing in Gold for Your Child’s Future
When it comes to securing a child’s future, many parents often receive gold as gifts for their newborns. However, storing physical gold at home may not be the most feasible option for everyone. This has led to an increasing trend of parents opting for digital gold investments as a means of securing their child’s financial future.
Ahmedabad-based Jay Patel, 29, has been a proponent of investing in sovereign gold bonds (SGB) for his three-year-old child. Annually investing in 1 tola (12 grams) of SGB, Patel purchases the units from his account and transfers them to his daughter’s demat account. As a research analyst at a brokerage firm, Patel also utilizes his daughter’s demat account for gifting stocks, participating in initial public offerings (IPOs), and implementing a systematic investment plan (SIP) of ₹25,000 in a flexi-cap mutual fund.
According to Patel, these investments will not only grow along with his daughter but will also serve as an avenue for initiating conversations around the value of saving and investing.
While a minor’s demat account, operated by a parent until the child reaches 18, cannot be used for purchasing shares, parents can transfer stocks as gifts to this account. To open a minor’s demat account, parents can engage the services of a stockbroker, with the child being required to possess both a PAN and Aadhaar for this purpose.
Safeguarding Investments and Health with Insurance
Bengaluru-based Ashish Malhotra (39) has been investing for his seven-year-old son since he was six months. The fintech professional aims to build a ₹40 lakh corpus in equity MFs for his child. Malhotra, who plans to use this corpus for his son’s higher studies, wants to ensure that his son’s investments remain separate. Hence, his son has a separate minor bank account and MF folio.
A recent health scare had Malhotra also looking at health insurance options more seriously. “Our son had to undergo a surgery last year. Luckily, we had an adequate family floater plan which covered the expenses. But, now I am trying to get ₹50 lakh super top-up on this plan just for him,” he says.
Malhotra says he doesn’t want to be in a situation where a health emergency can potentially eat into his son’s investment portfolio. A super top-up is a health cover that becomes active after the hospital bill exceeds the deductibles, which can be paid from your existing personal or employer insurance.
In Malhotra’s case, the super top-up of ₹50 lakh on his family floater will become active after the deductibles of ₹5 lakh is exceeded.
Financial experts say that parents should get the newborn added to their existing health policy. If the parents already have a family floater, they need to inform their insurer. A newborn can get added to an existing health policy of the parents after 90 days. If the parents have individual health covers, they can get this converted into a family floater.
Salaried parents should inform their employers to get the child added in the health policy given by companies. Newborns are usually covered from day 1 in employer policies. Parents should also add their newborn as nominee in life insurance.
Tax Implications of Investments in Child’s Name
Investing in the name of a child can impact the taxation of capital gains and income. An expert consultant, highlights the advantage of investing in a child’s name, as it deters parents from early redemption and provides tax benefits. When investments are redeemed by the child after turning 18, capital gains are taxed in the child’s PAN, not that of the parents. However, investing in recurring income generating instruments such as fixed deposits for minors may lead to income being taxed in the parent’s hands. Additionally, clubbing provisions provide a ₹1,500 tax exemption.
Balancing Financial Priorities
While planning for their children’s future is crucial, parents must also prioritize their own financial goals. Expert Financial Planners and Advisors, emphasizes the significance of balancing financial planning for children’s education and wedding with the need to secure a retirement corpus. As parents plan for their children’s milestones, it is essential not to lose sight of their own long-term financial objectives, ensuring a sustainable retirement fund to cover inflation-adjusted expenses over the years.
