Direct mutual funds can prove to be a great means of constructing a long-term financial buffer for your child's future. With lower charges and potential for superior returns compared to regular plans, they let more of your hard-earned money work in your favour. Here's how to get started.
Understand what direct mutual funds are
Direct plans are fund of fund schemes bought directly from the fund house without the services of an intermediary such as a broker or distributor. Commissions are not charged, and hence the expense ratio is lesser and this could reflect in the form of increased returns in the long term — a vital advantage for long-term child-specific investments.
Set clear financial goals
Choose what you are investing for — education, extracurricular activities, or a business venture. Knowing the time horizon and rough figure you'll need will help you choose the right type of mutual fund and decide how much you should invest every month.
Choose the right type of mutual fund
For long-term time frame, equity mutual funds or hybrid funds with higher equity component are preferred as they give growth scope for 8–10 years or even longer. Debt or balanced funds cut the risk if the aim is nearer.
Invest in your child's name if suitable
You can invest in your name on behalf of your child or open an account in the child's name with your guardianship. If investing in their name, then you would need to present documents like their birth certificate and your KYK documents. This also directly goes into asset creation on their behalf.
Start early and invest consistently
Compounding is best done over time. Starting when your child is young lets your investments grow hugely. A SIP in a direct mutual fund keeps you disciplined and lets wealth grow in the long term.
Use online platforms or AMC websites
To invest in direct plans, go to the website of the asset management company (AMC) or use any well-known direct investment websites. Do your KYC online, select the direct plan option, select your scheme, and set your SIP or lump-sum.
Monitor performance from time to time
While direct mutual funds are intended for long-term holding, review them at least every year to ensure they're headed in the direction of your purpose. Avoid ongoing switching, as retaining is crucial for compounding.
Mind the taxation
Equity fund returns are exempt from tax up to ₹1 lakh in a year if you hold them for over 12 months; after that, they are taxed at 10% without indexation. Debt fund rules are different, so factor in tax implications while planning.
Rebalance as you close in on the goal
As the deadline draws close, gradually shift your corpus to less-risky debt funds or liquid funds. This protects the amount accumulated from sudden market drops.
Teaching the child about investment
As the child grows up, involve the child in tracking the investment. This not only makes the child financially literate but also teaches them the value of planning and patience.
FAQs
Q. Can I open a mutual fund account in my minor child's name?
Yes. You can invest in his/her name along with yourself as guardian, using documents like his/her birth certificate and your KYK details.
Q. Are direct mutual funds child investment-proof?
They share the same market risk as regular mutual funds but lower cost, so they are more effective. Safety is fund dependent and unlike fixed deposits, which guarantee safety, it also comes down to your horizon.
Q. What should I invest each month for my child's future?
This depends upon your goal amount, time horizon, and assumed returns. A SIP calculator can be employed to calculate the right monthly amount.
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