Practicing financial discipline at an early age is important as it helps to inculcate the habit of saving money. Parents play a key role in teaching their children the significance of becoming financially independent, spending wisely and saving. These kinds of conversations should happen in the interest of the kids so that they can be more participative in such discussions.
Parents always want to give their kids the best the world has to offer. But many of the best things come at a cost, and therefore it is crucial for kids to understand the importance of this cost and value it. Ask your children: Do you need it or do you greed it? This is a test that parents should also take while making a big spend such as new shoes or buying a new bag or phone. This test will also help kids understand the importance of money and also make them financially savvy.
Children learn a lot from seeing what their parents do. So, to avoid money wars at home with kids, go through this test yourself while making a purchase. Financial independence is something that you can gift to your children at an early age.
It is also important for parents to teach their children how to operate a bank account. This will help them understand the importance of savings and set a strong base of financial knowledge.
Along with these, you could also explain the concept of long-term and short-term goals. Before taking investment decisions, it is important to prioritise financial goals and divide them into long-term and short-term according to the time span you want to achieve those goals in. For example, higher education and marriage can be categorised as long-term goals, which are more than five years away; while planning a trip with kids, purchasing a laptop or a vehicle can be short-term goals, which are to be achieved in less than five years. According to the time span, start investing a part of your salary.
Mutual Funds Investing For Minors
Short-term goal investments can be made in debt mutual funds while for long-term investments (5+ years), Systematic Investment Plans (SIPs) in equity mutual funds is more suitable. Minors are allowed to invest in any mutual fund scheme.
Here are some recommended fund categories according to the time horizon parents want to make an investment for their kids:
Ultra short-term debt funds: Less than 1 year
Floating rate, short term debt funds: 1-3 years
Floating rate, short term debt funds: 3-5 years
Flexi cap, mid-cap, small-cap: 5+ years
Mutual fund investments can be made in the name of a minor with the assistance of parents or guardians who are required to sign the documents. The documents needed to start investing in mutual funds are: PAN card of guardian/parent, minor’s birth certificate and a cancelled cheque leaf of the minor’s account (bank account should have minor’s name as well as the parent’s name). In case of guardian appointed by the court, a copy of the court order will be an essential document to provide. Also, as per the regulations, the minor’s parent/guardian will have to be KYC compliant.
This procedure must be followed until the child turns 18. At the age of 18, the child’s status is changed to adult. For this change in status, a duly filled MAM (Minor to Major) form needs to be submitted to the asset management company and the KYC process will be run in his/her name along with a change in his/her bank account status.
Until the minor turns 18, taxation on dividends or redemption of mutual fund units will be paid by parents or guardians. Dividends or income received from the minor’s investment will be added to parent’s/guardian's income for taxation.
Mutual funds bring in the potential of compounding capital, which is a good opportunity for minor investors. Mutual fund investments are also beneficial to build a financially secure future for the child. So, gift your child financial independence this Christmas.
The author is Co-Founder, tarrakki