An individual’s investment journey starts right from the cradle, say financial planners: So, while childbirth is an exciting time for parents, despite the hardship and expenses, it is also time for them to chart financial goals that align with the child’s future, particularly higher education and marriage.
An individual’s investment journey starts right from the cradle, say financial planners: So, while childbirth is an exciting time for parents, despite the hardship and expenses, it is also time for them to chart financial goals that align with the child’s future, particularly higher education and marriage.
Parents can start investing for these long-term goals immediately after childbirth. They can do so using their own bank accounts or start a new one for the child. These days, many parents prefer to open separate accounts for their children and invest in them—investments that can be accessed by the children after they turn 18 years of age.
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Parents can start investing for these long-term goals immediately after childbirth. They can do so using their own bank accounts or start a new one for the child. These days, many parents prefer to open separate accounts for their children and invest in them—investments that can be accessed by the children after they turn 18 years of age.
Other than investments, it is also important for parents to add newborns to their healthcare policies. This will help them meet the expenses of any emergency medical procedure the child may need.
Here is how new parents can start investing today for their child’s future financial needs.
Proofs: Aadhaar and PAN
A birth certificate is essential to obtain Aadhaar ID or PAN for the newborn. Enrolling for Aadhaar ID is easy and can be done at any of the permanent Aadhaar centres. The details available on a parent’s Aadhaar —phone number, email id and address—are added to the newborn’s Aadhaar. Only the newborns picture is taken during enrolment, while the biometrics information is captured after the child attains the age of five. .
For PAN card, parents need to submit an application (form 49A) to the NSDL (National Securities Depository to NSDL’s Pune office along with supporting documents. These documents include address, identity and date of birth proof of the newborn.
Start with a bank account
Parents can use their own bank account or open a bank account in the child’s name. A minor bank account——a joint account wherein one of the parent is a guardian and considered the second account-holder—is mandatory if the investments are routed through a demat account. This bank account can also be used for depositing any cash gifts given to the child.
Opening a minor bank account is a simple process. All you need is the birth certificate of the child, parent’s PAN (permanent account number) and Aadhaar number as address proof. PAN and Aadhaar are not required if the parent has an existing account with the same bank.
Banks have different terms and conditions for minor savings account. For one, the minimum average balance (MAB) requirement can be anywhere between ₹2,500 and ₹10,000.
Mutual funds
Parents or guardian can invest in a minor’s MF account through their own banks. However, the redemption proceeds will only be transferred to the minor’s bank account.
To open a MF account, the child’s birth certificate needs to be produced to establish age and relationship with the parent or legal guardian. Along with this, a cancelled cheque of the child or parent’s bank account has to be submitted.
Mumbai-based Sneha Jain, 36, has created separate bank accounts for her six-and-half-year-old daughter and four-year-old son. Since her children were six months, she has been investing in MFs, which are held in their names. For each child, she makes monthly investments of ₹30,000 through systematic investment plans (SIPs), from their bank accounts.
Jain, a wealth manager, says she wants to stick to MFs for the long-term goals of her children. “I have opted for equity funds – a multi-cap and a children’s fund – for each child. Equity funds tend to do well over longer periods as impact of market-linked volatility evens out over longer time frames,” she says. The children’s fund comes with a high exit load, which deters parents from making any early redemptions.
Jain also invests ₹5,000 every month in Sukanya Samriddhi Yojana (SSY) for her daughter.
SSY and public provident fund
A SSY account can be opened any time after the birth of a girl child till she turns 10 years old. The account can be opened with minimum investment of ₹250, and a maximum of ₹1.5 lakh can be deposited in it in a financial year. The government recently hiked the interest rate on SSY deposits to 8.2% from 8%.
An SSY account can be opened at a bank or any post office. The parents need to submit birth certificate of the child and their own KYC (know your customer) documents such as PAN and Aadhaar. Deposits in an SSY account can be made for 15 years. The account will mature 21 years after its opening. If the girl marries before the age of 21, the account will be closed.
Parents can also open a public provident fund (PPF) account for children. The documents required for this are similar to that of SSY.
A minimum deposit of ₹100 is needed to activate the PPF account. The annual contribution can be anywhere between ₹500 and ₹1.5 lakh. The current interest rate offered by PPF stands at 7.1%.
One of the benefits of starting a PPF account early is that by the time the child turns 18, the mandatory 15-year lock-in of the PPF account lapses, and the child can decide whether to close it or continue with it.
Both the SSY and PPF fall in EEE (exempt-exempt-exempt) tax category. So, the parent contributing to these accounts can claim tax deduction (combined limit of ₹1.5 lakh under Section 80C); the interest earned is tax free and the maturity amount is also tax free.
Gold
Often, gifts received by parents on behalf of their newborns are in the form of gold coins or gold bars. Parents can opt for digital gold investments if they are not comfortable storing gold in their homes.
Ahmedabad-based Jay Patel, 29, says he has been investing in 1 tola (12 grams) of sovereign gold bond (SGB) annually for the last couple of years for his three-year old baby. He purchases the SGB units from his account and transfers them to his daughter’s demat account. Patel, who works as research analyst at a brokerage firm, also uses his daughter’s demat account to gift her stocks and invest in initial public offerings (IPOs) besides a systematic investment plan (SIP) of ₹25,000 in a flexi-cap mutual fund.
“As my daughter grows, these investments will also grow, and this will allow us to have a conversation with our daughter around the importance of saving and investing,” says Patel.
A minor’s demat account, which is operated by a parent till the child turns 18, cannot be used to buy shares but a parent can transfer such stock as gifts to this account. A minor’s demat account can be opened through a stockbroker. The child needs to have both PAN and Aadhaar for this purpose.
Health risks
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 impact
Capital gains or income accruing from the investments made in the newborn’s name will get clubbed with the income of the parent earning higher income.
Nitesh Buddhadev, founder of Nimit Consultancy, says that investing in a child’s name not only deters parent from early redemption, but also helps them in terms of taxation.
“If the investment is redeemed by the child after he or she turns 18, capital gains will be taxed in the child’s PAN, and not that of the parents. This is also the reason that it is advisable that investments made in minor’s name are not in recurring income- or interest- generating instruments such as fixed deposits. Income received on such investments before the child turns 18 will still be taxed in the parent’s hands,” he points out. In case of clubbing, ₹1,500 tax exemption is available.
Balancing act
While planning for children’s future is important, parents need to continue to plan for their own goals as well. “Parents should keep in mind that higher education and children’s wedding are important goals, but a retirement corpus needs to last for a long time, say 20-25 years, and take care of the inflation-adjusted expenses in the future. So, they should not lose sight of their personal goals, while planning for their children’s future,” says Kalpesh Ashar, founder of Full Circle Financial Planners and Advisors.
