Every parent dreams of securing their child’s future — whether it’s funding education, supporting a passion, or providing financial stability as they start their adult lives. Achieving these goals often begins with consistent and thoughtful future planning.
Among the many investment options available, parents commonly weigh two paths: investing in a children’s mutual fund on behalf of their kids through a minor account or investing in their own name while earmarking the funds for the child. Both are valid strategies but differ in flexibility, control, and taxation.
This guide explains how each works, how they compare, and how you can choose an approach that fits your family’s financial plan.
Table of Content
What are Children’s Mutual Funds and How Do They Work?
A children’s mutual fund scheme is a type of open-ended solution-oriented mutual fund designed to help parents or guardians plan for a child’s long-term financial goals such as education, career development, or marriage. These funds aim to build disciplined savings habits by investing in a mix of equity and debt instruments to balance potential growth with relative stability.
Children’s mutual funds have a lock-in period of five years or until the child reaches 18 years of age (whichever comes earlier). Investments in a minor’s name can be made by a KYC-compliant guardian, (either a parent or legal guardian appointed by the court) with supporting relationship and age-proof documents. The investment contribution can be made from a bank account held in the name of the minor, the parent/guardian, or a joint account held by the minor with the parent/guardian.
Pros and Cons of Investing in a Children’s Fund
Pros
Help parents earmark savings exclusively for a child’s future planning goals, such as higher education or marriage.
Encourage financial awareness in children by introducing them to saving and investing early.
Build emotional discipline, motivating parents to stay invested and avoid withdrawals post the lock-in period.
Tax liability applies to the parent until the child turns 18 and then shifts to the child, who may have little or no other income.
Cons
Require additional documentation, including proof of age, relationship, and guardian KYC.
Come with a five-year lock-in period, limiting access to funds in the short term.
Need minor-to-major conversion at 18 and delays in doing so can freeze the account.
Once the child attains majority, they gain control of the investment and may require support in handling it prudently.
How Does Investing in Your Own Name Work?
Instead of using a children’s mutual fund, many parents choose to invest in their own name and simply earmark that investment for the child’s goals. This approach can include SIPs in various equity, debt, and hybrid mutual fund schemes. In this scenario, the parent has flexibility - deciding when to redeem, rebalance, or change the fund mix without having to wait for the lock-in period to get over.
This flexibility is valuable when family priorities evolve or when you prefer to make tactical adjustments. However, it requires discipline because without a formal lock-in, it’s easy to repurpose the funds for other short-term needs. In this approach, all tax liabilities stay with the parent, even after the child turns 18. Yet, many parents prefer this simplicity and the ease of online investing in their own name.
Pros and Cons of Investing in Your Own Name
Pros
Provides complete control over investment decisions and redemption timelines.
Offers full liquidity, allowing access to funds whenever needed.
Keeps documentation and taxation simple, avoiding minor-to-major transfer processes.
Enables portfolio flexibility, allowing investment across different types of mutual funds schemes.
Cons
Requires self-discipline to keep funds reserved for the child’s goals.
May lack the psychological motivation that comes with investing directly in the child’s name.
Retains tax liability entirely with the parent throughout the investment period, which may become high if the parent invests in debt-oriented funds and falls under a higher bracket.
May cause goal overlap if child-focused investments mix with other financial priorities.
Child Mutual Funds Vs. Investing in Own Name: Comparing the Two Approaches
A) Ownership and Control
In a children’s mutual fund, the investment legally belongs to the child, though a parent or guardian manages it until they reach adulthood. Here, the actual ownership lies with the minor, with their parent/guardian acting as a custodian. Once the child turns 18, full control passes to them.
When you invest in your own name, you hold ownership and can decide when and how to use the corpus. This flexibility benefits parents who want to retain control and make adjustments to their investments as their needs evolve. However, it also places the onus of discipline on the parent.
In short:
Investing in a children’s mutual fund means parental management and eventual transfer of control to the child once they reach major status.
Investing in your own name means continuous personal control, but requires self-imposed restraint to avoid repurposing of the fund for short-term needs.
B) Investment Objective
A children’s fund is inherently goal-oriented. It’s structured to encourage parents to stay invested for specific milestones of the child like education or marriage. Because the investment is linked to a defined objective, it tends to promote long-term thinking.
Investing in your own name, meanwhile, offers flexible allocation. You can pursue multiple goals like retirement, buying a house, and saving for your child’s education simultaneously, through one consolidated portfolio. This gives broader financial control but may blur the boundaries between objectives if not carefully tracked.
Parents who prefer clear, goal-linked planning often find the structure of a children’s mutual fund helpful. Those comfortable with tracking and managing their own asset allocation may prefer the versatility of investing in their own name.
C) Taxation Aspects
Children’s Mutual Fund: Until the child turns 18, income or capital gains are clubbed with the parent’s income and taxed accordingly. Once the child becomes an adult, ownership and tax responsibility transfer to them. Since young adults often have little or no other income, the effective tax burden on realised gains may be lower (depending on prevailing tax rules at the time).
Investing in Your Own Name: Here, all realised gains are taxed in the parent’s hands throughout. Short-term capital gains on equity funds are taxed at 20%, while long-term gains attract a 12.5% tax with an exemption limit of ₹1.25 Lakhs. Gains from debt funds are added to the parent’s tax slab and taxed accordingly. In short, there’s no transfer of ownership or tax liability.
In both cases, investors should maintain proper documentation and consult a tax professional for clarity.
D) Liquidity and Access
Redemptions in children’s mutual funds is only permitted after the end of the 5-year lock-in period or once the child reaches adulthood (whichever happens first). This makes them suitable for parents who have enough liquidity and wish to ring-fence funds for a future milestone and avoid early withdrawals.
When you invest in your own name, the money remains fully accessible. You can redeem your investment partially or fully at any time, which offers convenience in emergencies. However, this also increases the chance of disrupting long-term goals if discipline slips.
In essence, children’s funds encourage commitment through structural discipline; self-managed portfolios offer freedom — but demand consistency.
How to Choose Between the Two?
Here are a few things you can consider when choosing the right approach for your child’s future planning:
Some parents also choose a combined approach. They invest a core portion in a children’s mutual fund for long-term goals like education, while maintaining an additional allocation in a savings mutual fund or equity saving scheme in their own name for flexibility. This balance allows them to stay disciplined toward the child’s objectives while retaining access to funds for unforeseen needs.
Conclusion
Whether you invest in a children’s mutual fund or in your own name, the ultimate goal remains the same: focusing on your child’s future planning and securing their education and other needs through planned, consistent investing.
A children’s mutual fund brings structure, purpose, and discipline to long-term investing, while investing in your own name offers flexibility, simplicity, and ease of access. Many parents may also find that combining the two approaches works better. The most important step is to start early, invest regularly, and review your portfolio periodically to ensure it stays aligned with your child’s evolving goals and your overall financial plan.
Disclaimer:
An Investor Education and Awareness Initiative by Tata Mutual Fund.
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