From savings to investments: Securing your child's tomorrow

In 2014, the Reserve Bank of India (RBI) allowed banks to offer savings accounts to minors, and since then, many banks have launched savings accounts for children. For example, SBI offers Pehla Kadam and Pehli Udaan, HDFC Bank has Kids Advantage, Kotak Mahindra Bank has My Junior, and Axis Bank has Future Stars Savings Account.

These accounts usually come in two types: one for children under 10 and another for those between 10 and 18. For kids under 10, the account is typically operated jointly by a parent or guardian, while children between 10 and 18 can operate it independently. When the child turns 18, the account becomes dormant and needs to be converted to a regular savings account.

To open a minor savings account, banks typically require documents like the child's birth certificate, proof of relationship between the parent/guardian and the child, PAN of the parents/guardian, and address proof.

These accounts offer facilities like internet banking, debit cards, ATM usage, cheque books, and passbooks, with interest rates ranging from 2.5% to 5%. Some banks waive the minimum average balance or keep it low, around Rs 250.

“Alternatively, the UPI Circle feature allows users to make payments from a shared account, which can be useful for family members like children who don't have their own bank account,” said Rahul Jain, CFO, NTT DATA Payment Services India. This feature enables secondary users to make transactions with explicit consent from the primary user.

Investing in your Child's name: Demat accounts and procedures

For parents looking to build long-term wealth directly for their children, opening investment accounts in the minor's name is a viable and tax-efficient strategy, provided it's suitable for your financial goals. Under 18-year-olds cannot independently trade stocks or mutual funds, but guardians can establish a Demat or mutual fund account using the child's PAN card, birth certificate, and the parent's KYC documents. This setup allows seamless asset accumulation in the child's favor, with the guardian as the operating participant for all transactions.

To initiate, select a broker that supports minor accounts—most do without hassle. Shares from your personal Demat can be gifted to the child's via an off-market transfer using a Delivery Instruction Slip (DIS), ensuring compliance and avoiding direct sales restrictions. For mutual funds, lump-sum or SIP investments are straightforward if the child's bank account enables UPI or online banking, with redemption proceeds credited solely to their account. Features like these vary by broker, so verify upfront.

Opt for direct mutual funds to minimize costs while exposing the portfolio to market-linked growth; they carry the same risks as regular funds, hinging on the scheme's quality and your investment horizon rather than guarantees like fixed deposits. This approach fosters financial independence early, but always align with the child's needs and consult an advisor for personalized fit.

You can invest in mutual funds in your child's name via MF Utility, even without a bank account in their name initially. As guardian, you manage investments, and funds can come from your account, a joint account, or the child's account. Sale proceeds must go to the minor's or joint account. When the child turns 18, update KYC and transfer the folio to their name, which involves updating details with each mutual fund company.

Open Sukanya Samriddhi Account for your daughter

Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme for girls under 10, offering high interest rates and tax-free maturity proceeds. Open an account with a minimum Rs 250 deposit and contribute up to Rs 1.5 lakh yearly. Benefits include tax deductions under Section 80C, attractive interest rates (8.2% for FY 2025), and tax-free interest and maturity benefits. The account matures after 21 years or marriage (after 18), with partial withdrawals allowed for education or marriage after 18. Required documents include birth certificate, KYC docs, and ID proofs.

The Rs 1.5 lakh annual investment limit for SSY should be raised to boost long-term savings, said Harshil Morjaria, a certified financial planner at ValueCurve Financial Services. He suggests indexing the limit to inflation, with a hike every three-year, considering rising education costs.

A guardian can open other government-backed products for minors like recurring deposits, time deposits, and national savings certificates (NSC), with some allowing kids above 10 to operate them independently.

NPS Vatsalya: A long-term investment for your child's future

NPS Vatsalya is a savings scheme under the National Pension System (NPS) designed for parents to build a long-term corpus for children under 18. Regulated by PFRDA, it promotes disciplined investing from an early age. Parents or guardians can open and manage the account, with a minimum annual contribution of Rs 1,000 and no upper limit. The account converts to a standard NPS account at 18, with limited withdrawals allowed before then. At maturity, 80 percent of the corpus must be annuitized, with 20 percent available as a lump-sum payout. It's a tool for teaching financial literacy and long-term investing, though not ideal for short-term goals.