#MutualFundScheme

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The possibility of a dividend payout Ajit Dayal, Chairman, Quantum Asset Management Company Pvt Ltd answers an investor's query on why we don't declare dividends in our mutual fund schemes. To Watch the full video please click on the following link: https://www.youtube.com/watch?v=QSPB3UXWQ6w www.Quantumamc.com

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Smart & Advance Way To Start SIPs For Your Child’s Financial Future

Are you serious about your children's future?

Of course, I am.

Was this your response?

Please don't get annoyed by the question.

The intent of raising it now wasn't to hurt you.

Quite often it happens that, despite having a good purpose, we end up doing ordinarily in the end.

I want to send my child to a good college for higher studies—Great!

He/she should have an option to pursue a master's programme abroad—Excellent!

And soon after he/she settles abroad, I want to get him/her married in a grand destination wedding—Awesome!

But, are you doing enough to make all this happen?

Thus, saving money for the future needs isn't enough.

Inflation spoils the party.

You need to invest intelligently.

How should you plan for your child's better future?

Estimate the amount you would need in future.

Earmark the amount you will have to invest per month.

Select appropriate mutual fund schemes with a proven track record (or alternatively take expert help in choosing them) Opt for Systematic Investment Plan (or SIPs) to invest in mutual funds.

And Using various hypothetical rates try to estimate where your investments might take you (You might use PersonalFN's SIP calculator for this purpose)

If you have not been SIP-ping in equity-oriented mutual funds until now, you should start soon! What is SIP?

Simply put, SIP is a mode of investing in mutual fund schemes in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit. Hence, your investments (in mutual funds) are subject to market risk.

A SIP enforces a disciplined approach towards investing, and you inculcate the habit of saving before spending, which we all probably learnt when we maintained a piggy bank.

Yes, those good old days where our parents gave us some pocket money, which after expenditure we deposited in our piggy banks and at the end of particular tenure, we saw that every rupee saved became a large amount.

SIPs work on the simple principle of investing regularly, which enables you to build wealth over the long-term. In case of SIPs, on a specified date which can be on a daily basis, monthly basis, or on a quarterly basis, a fixed amount you decide on is debited from your bank account (either through a ECS mandate or through post-dated cheques forwarded), and invested in the scheme as selected by you for a specified tenure (months, years).

Today some Asset Management Companies (AMCs) / mutual fund houses / robo-advisory platforms also provide the ease and convenience of transacting in mutual funds online. They have set up their own online transaction platforms, where one can do SIP investments by following the procedure as made available on the websites.

[Read: How To Invest In Mutual Funds Online]

So, you have fewer hassles while investing as well as tracking your investment dates.

To quote Albert Einstein, the eighth wonder of the world, the power of compounding plays a crucial role in generating a substantial corpus for your child's future.

But, it's important to invest in the right mutual fund scheme. Otherwise, you will wonder about the eighth wonder.

Here are 5 benefits of SIPs:

1. SIPs are light on the wallet

If you cannot invest Rs 5,000 in one shot, that's not a huge stumbling block, you can simply take the SIP route and trigger the mutual fund investment with as low as Rs 500 per month.

SIPs enable you to invest in smaller amounts at regular intervals (daily, monthly or quarterly).

2. SIPs make market timing irrelevant

Timing the market can be hazardous to your wealth and health. Instead, focus on 'time in the market' in the endeavour to create wealth by selecting the best mutual fund schemes to SIP. If you stay invested in a promising mutual fund scheme for the long-term, it can help you accomplish your financial goals.

3. SIPs enable rupee-cost averaging

Volatility is the very nature of the market; but with SIPs, you can mitigate this volatility. When markets undergo turbulence, rupee-cost averaging comes into play.

Meaning, typically buy more units of a mutual fund scheme when prices are low, and buy fewer mutual units when prices are high. SIPs work in your favour when markets go downhill, and when they are flat quite some time.

4. SIPs benefit from the power of compounding

As SIPs subscribe you to the habit of investing regularly, it enables you to compound your money invested.

So, say you start a SIP of Rs 1,000, in a mutual fund scheme following prudent investment system and processes, with a SIP tenure of 20 years and expect a modest return of 15% p.a., your money would grow to approximately Rs 15 lakh.

So, over the long-term, SIPs can compound wealth better and systematically as opposed to investing a lump sum, especially when the journey of wealth creation is volatile.

5. SIPs are effective medium for goal planning

All of us have financial goals – may be buying a house, buying a dream car, providing good education to children, getting them (children) married well, retiring etc.

But all this comes with systematic financial planning. Very often many invest in the equity markets, with a motive of making short-term gains, and often ignore to use the equity markets as a window for long-term wealth creation, to achieve one's financial goals. The earlier you start SIPs the better it is.

Do you know?

A difference of 4.4% compounded annualised returns on your SIP investments can fetch you additional Rs 45 lakh over 15 years?

The power of compounding and smart selection of mutual fund schemes, working in conjunction, can help you grow wealth.

Want a superlative research-backed guidance to select winning mutual fund schemes to plan your child's future needs?

Consider PersonalFN.

PersonalFN has a dependable track record, guiding investors to achieve their envisioned financial goals with its unbiased views.

PersonalFN does not take shortcuts with research before recommending mutual fund schemes to investors. A comprehensive rating methodology is followed.

PersonalFN analyses thousands of data points to shortlist schemes and also applies a whole host of quantitative and qualitative parameters to select winning mutual fund schemes for your portfolio.

PersonalFN's Mutual Fund Research service 'FundSelect' Vs. S&P BSE 200

Data as on March 28, 2018

(Source: ACE MF, PersonalFN Research)

Out of every four funds recommended in the

FundSelect

— a premium mutual fund research service of PersonalFN, three have always outperformed BSE 200 index. That's the success rate of PersonalFN.

Those who started following PersonalFN's recommendations in June 2003 might have grown their wealth at 21.0% compounded annualised rate vis-à-vis 16.6% returns generated by BSE 200.

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What's more?

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The lower expense ratio for Direct Plans of mutual fund schemes can add significant wealth in the long-run. The magic of power of compounding works better with Direct Plans.

You can potentially build a BIGGER corpus by opting for PersonalFN's robo-advisory platform that offers research-backed recommendations.

So, stay tuned!

Author: PersonalFN Content & Research Team

This post on " Smart & Advance Way To Start SIPs For Your Child’s Financial Future " appeared first on "PersonalFN"

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5 Things SEBI Needs To Do Right Away For Mutual Fund Investors

The Securities and Exchange Board of India (SEBI) has safeguarded investors’ interest by making mutual fund houses more accountable.  Guidelines governing the industry are strict, clear, and one of the best in the global context.

But there is still more to do.

Although instances of mis-selling have been curbed, they haven’t stopped completely. Every time the capital market regulator comes out with stricter regulations, mutual fund houses and their channel partners find a way to achieve their objectives, perhaps, compromising the investors’ interest.

What should SEBI’s next action plan be?

1. Tighten the noose around close-ended schemes

Soon after the capital market regulator issued strict guidelines for open-ended mutual fund schemes for equity and debt both, fund houses floated more close-ended schemes.

New Fund Offers (NFOs) in the form of close-ended schemes not only help mutual fund houses grow their Assets Under Management (AUM), but also help escape the stringent rules applicable to open-ended schemes.

This is a major lacuna in the regulatory framework, and in the investors’ interest, the regulator must fix it with appropriate guidelines.

PersonalFN has highlighted the drawbacks of close-ended schemes on numerous occasions. Recently, it published a couple of articles to create awareness among investors:

5 Reasons To Avoid Close-ended Mutual Funds

Close-ended NFO Factories: Should You Invest?

The capital market regulator should take strict action against the irresponsible behaviour of mutual fund houses and their channel partners.

When the equity indices hit new highs, it’s relatively easy to convince, new investors. Mutual fund houses have mastered the art of playing with investors’ psyche to grow their AUM. They launch close-ended schemes, at a time, when valuations are stretched and committing more money to equity is risky.

As a result, most of the close-ended schemes underperform compared to their open-ended counterparts. In the name of offering stability to the scheme’s operations, “close-ended” nature of the schemes makes them less accountable and lethargic.

2. Do away with the dividend reinvestment option

Dividend reinvestment option, in our view, is a fool’s choice!

Those who do not want regular income should select growth option and those prefer to have occasional pay-outs, should choose dividend pay-out option.

Let’s first understand how these options work. Under growth options, the gains are accumulated and automatically retained and reinvested. In dividend option, at the discretion of the fund house, the gains are distributed among investors.

But under dividend reinvestment options, when the dividend is announced and paid, the proceeds are utilised to buy the units of the same fund at ex-dividend Net Asset Value (NAV).

(Image source: freeimages.com)

What’s the loss?

Dividends are tax-free in the hands of investors. But the mutual fund houses have to pay the dividend distribution tax before paying any dividend. Therefore, dividends aren’t totally tax-free.

Even as far as equity-oriented mutual fund schemes are concerned, the dividend option has become less attractive. As you may know, the Union Budget 2018 introduced dividend distribution tax @ 10% on equity-oriented mutual fund schemes.

Do you still think, dividend reinvestment option should stay?

Hopefully, the capital market regulator would also think on the similar lines.

PersonalFN has always encouraged investors to select their options carefully. Read some of the pertinent articles by clicking on the links below:

Should You Opt For Dividend Option Offered By Equity Funds Now  

Choose between dividend and growth option wisely

4 Myths About Dividends Declared By Mutual Funds Debunked

3. Discontinue monthly dividend options in balanced funds

As interest rates fell substantially over last three years, and sharply post-demonetisation; mutual funds started to attract conservative investors to balanced funds backed by a skewed narrative.

Since conservative investors have a strong preference for dividend-pay-outs, a few mutual fund houses launched monthly divided options.

(Image source: freeimages.com)

Recently, before the new financial year, many of mutual fund schemes paid dividends before dividend distribution tax on equity-oriented mutual funds being applicable. They were able to do so with huge gains made over last three-four years.

But such options are always misleading.

Under challenging market conditions, how many of these fund houses will be able to sustain the quantum of dividends they have distributed every month till now?

And let’s not forget, even if you as investors earn dividends and make losses on your capital, due to fall in the NAV post dividend distribution, the net effect is not positive.

4. End ‘copy-and-paste’ of liquid and liquid plus schemes

Observe carefully, many fund houses have similar liquid funds and liquid plus schemes (also known as ultra-short term schemes) in their product bouquet. It is challending to figure out the difference in their mandate and portfolio preferences.

But in this regard we are hopeful that the regulator will prudently regulate, as it did for scheme mergers of similar equity-oriented funds from the same mutual fund house.

5. Need to cap expense ratio of arbitrage funds

Arbitrage funds are classified as equity-oriented schemes for taxation purpose, but their return profile is comparable to that of liquid and liquid plus schemes (also known as ultra-short term schemes).

But their expense ratio is often near 1% –––rather high. Large commissions are paid to distributors to sell these funds.

(Image source: freeimages.com)

Until now, they were marketed as the tax-efficient alternatives to short-term debt schemes.

But soon after the government imposed dividend distribution tax and the long-term capital gains tax on equity-oriented schemes, they have lost their appeal.

PersonalFN has written some enlightening articles on arbitrage funds—comparing them with other available alternatives and explaining pros and cons of investing in them. Read:

Arbitrage Funds vs. Liquid Funds vs. Savings Bank A/C: How to Park Your Short-Term Funds

Arbitrage Funds: Do they work too hard for too little?  

The capital market regulator is playing a critical role in creating a fostering environment for all stakeholders: mutual fund houses, distributors, and investors.

Nonetheless, it is essential things that are beneficial for investors’ are done. If investors are happy, educated about invested, money will continue flow into mutual funds. Keeping this in mind, the regulator’s action on all the above mentioned issues would be crucial.

PersonalFN has always placed investors’ interest first!

We advise clients backed by thorough independent research, recognising their: risk profile, investment objectives, financial goals, and the investment time horizon before goals befall, among many other facets.  

PersonalFN believes, mutual fund investing is a serious business. At PersonalFN, our research team tests every mutual fund scheme through extensive scrutiny by a set exhaustive research process, consisting of both quantitative and qualitative parameters.

If you are looking at superlative research backed unbiased guidance to build a solid mutual fund portfolio, PersonalFN’ mutual fund research services are for you.

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The ideas in this article are inspired by Mr Pankaaj Maalde, and first appeared on ET and his blog.

This post on " 5 Things SEBI Needs To Do Right Away For Mutual Fund Investors " appeared first on "PersonalFN"

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Should You Trade In Mutual Funds As You Do In Stocks

The stock market is perceived to be a den to make quick money. Sections of the media, especially glamorous business channels, are seeding this erroneous idea among people, making them wear the traders’ hat. The fact is, a ‘trader’ is only good to until his last trade. You don’t know what the future has in store – good, bad, or ugly. Meaning, it is not necessary that every trading call would create wealth. Please note that, a stock market is not a casino to gamble …and if you wish to do so might as well visit Macau, Las Vegas, and likes, which are far more fun places.   The stock or equity market is an effective channel of wealth creation, of course; however, when you enter it, the utmost discipline, dexterity, and seriousness is required. Simply, because it is a matter of your hard-earned money, which you should not put to undue risk. “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”said Warren Buffet, a legendary investor.   So, always choose long-term investments as against short-term trading; because the latter may prove hazardous to your wealth and health. When you buy stocks (which are direct way to invest in equities) construct the portfolio in such a way that it can help you accomplish your financial goals, and not in a way that induces you to ‘trade’ based on the khabar or a tip on Dalal Street. If you don’t have the competence to invest directly in stocks, seek research services offered by an independent and unbiased research house. Alternatively, you may opt to invest in equity mutual funds owing to the merits such as:

Diversification;

Professional fund management;

Ease & convenience of investing (lower entry level and economies of scale);

Liquidity; and

For innovative plans / services (Systematic investment plans (SIPs), Systematic Transfer Plans (STPs), Asset allocation plans, trigger facility, etc.)

But remember that selecting mutual fund schemes for your investment portfolio is not alike buying vegetables from a grocery store. You ought to

adopt a scientific and rational approach to select the best mutual fund schemes

of the hundreds out there and not always go by the smooth persuasive pitch of mutual fund distributors / agents / relationship managers.

Broadly, here are 10 checkpoints for the right decision:

✔ Is the fund sponsor, a person(s) / entity of integrity; ✔ What is the investment philosophy, processes and systems followed at the fund house; ✔ What are the investment objectives of a respective mutual fund scheme, and whether it matches yours; ✔ The investment style followed by the fund house or a respective scheme; ✔ The experience and the track record of the fund management team; ✔ How has the performance of  the fund been; ✔ How much is the expense ratio; ✔ How much is the exit load; ✔ What are the tax implications of your investments; and ✔ What is level of investor services and transparency

But given our experience in mutual fund research over decades, we have to say that there are more nitty-gritties involved to select the best mutual fund schemes. And

here’s where PersonalFN research service, FundSelect comes to your rescue. We do all the gruelling, hard-core mutual fund research to recommend to you the best equity mutual fund schemes for your portfolio

, and also highlight the underperforming or average performing ones too

. We’ve discovered the secret to beat the market by a whopping 70%!

So, effectively you don’t need to ‘trade’ to make handsome gains.

Trading is not synonymous with mutual funds, yet many attempt to time the market while buying them. While, it is not ‘timing’, but the ‘time in’ the market that definitely matters for long-term wealth creation and to achieve the financial goals envisioned.  

Thus, don’t look at the fund’s NAV while transacting in mutual funds. The NAV of a mutual fund scheme is by no chance a valuation metric. There’s no way you determine a fund’s NAV is high or low, as it represents a basket of securities from different industries where multiple metrics are needed to accurately value the business.

Similarly, neither is the NAV a performance indicator (although integral for calculating returns). A higher NAV does not indicate that a fund has performed better than another with a lower NAV, nor does it signal the potential to earn better returns. This is because when you invest in a mutual fund, you buy units at its NAV, i.e. the current market price of all the assets that the mutual fund owns; all it represents is the total portfolio worth as against the outstanding units.

Likewise, don’t fall for the Rs 10/- proposition that comes with

New Fund Offerings (NFOs)

. You cannot expect listing gains in a mutual fund scheme. It is important to understand that a NAV of Rs 10/- during the NFO period is just the starting price. There is no underlying valuation of the fund for the price you pay. When a fund house comes up with a NFO, it is simply collecting funds from you, pooling it, and further investing it in securities. How the NAV pans out is subject to how well the fund manager has constructed the portfolio and controlled the risk involved.  

Therefore, a drop or spike in NAV of your mutual fund scheme should not compel to buy or sell your mutual fund holdings, steal your peace of mind, and/or give you jitters’. Instead when you transact in mutual funds, pay heed to host of quantitative, qualitative, and fundamental factors viz. performance---which includes returns, performance across market cycles, risks, risk-adjusted returns, comparative analysis--- portfolio characteristics, fund management style, costs (expense ratio and exit load), investment processes & systems followed at the fund house, among many other factors.

Don’t get swayed by the nonsensical rhetoric of some business channels and the so-called experts appearing on their shows, mutual fund distributors / agents / relationship managers or even your friends and family who would induce you to churn your portfolio on an illogical premise.

Amid times where the Indian equity market has scaled new heights, opting for the SIP or STP — the two modes of investing — would be a prudent approach / a strategy to mitigate the risk and volatility, instead of timing the market and going gung-ho. Systematic investing infuses a sense of discipline to regularly save and invest, facilitates rupee-cost averaging, and powers your portfolio with the benefit of compounding.  

Invest your hard-earned money prudently with diligent consideration to your risk profile, financial goals, and the asset allocation that’s best suited for you.

Take sensible decisions and be in complete control of your investments

Happy Investing!    

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3 Things To Do When A Mutual Fund Scheme Changes Fundamental Attributes

It is common sense to revisit basics when a/the circumstance/s has changed and you think you’ve taken a wrong turn. Imagine this… Your friend referred a doctor, who enjoyed a reputation for being one of the sharpest minds in the industry, to you. Lately, however, you noticed he’s devoting less time to his regular patients, including you, and busier with more critical cases. Many a times when you visit him for health concerns, you don’t even get a chance to speak with him; and, his support staff is obliged to “entertain” you. At some point, wouldn’t you reconsider continuing to subscribe to this doctor? Wouldn’t you ask yourself why, in the first place, you started to consult this renowned medical professional? This is defined as’ revisiting the basics’, and you may not agree, but this is an important exercise to ensure you are on the best path for your wellbeing. If this instance makes sense to you, then revisit basics when it comes to your mutual funds too! After all, fund managers are no less than your financial surgeons. They make sure your mutual fund investments are in good health. Of late, it’s been experienced that, many mutual fund schemes have changed their fundamental attributes. A change in primary attributes may rarely necessitate any action. For example, after the regulator allowed mutual funds to invest in Real Estate Investment Trusts (REITs), certain schemes altered the asset allocation mandate, such that it specifies an allocation to REITs as well. However, this amendment just provides an enabling power to the fund and may not necessarily translate into investments in REITs. So avoid jumping to conclusions. A change in the investment mandate is a fundamental shift, but it would be imprudent to redeem your mutual fund schemes, thinking your fund manager will exercise the option right away, and this could hamper your investment returns. First observe, whether the change in the primary attributes of a scheme is being introduced to offer more flexibility or will it eventually affect the functioning of the mutual fund scheme. For instance, if the investment mandate is moving from an aggressive to conservative, then maybe, you need revisit the fund as it could have a bearing on your asset allocation, impede the investment objective, and may be out-of-sync with your risk profile while you endeavour to achieve certain financial goals. Alternatively, you can always seek the assistance of a Certified Financial Guardian in such cases for this purpose,. However, some changes in the working of mutual fund schemes are inevitable and mostly occur because of technical factors. For example, a midcap fund may suddenly start carrying a large-cap dominated portfolio. This event is possible if the valuations in the mid and small cap segment are expensive. Under such circumstances check out if the fund manager alters the allocation between midcaps and largecaps within the mandated allocation limits. Keep cool if you find the change is within the mandated allocation limits. But if allocations have gone askew and continue to remain, then that should be a cause of concern. Sometimes, micro and small-cap funds deliver stunning returns when they are smaller in size. But riding this success, when their Asset Under Management (AUM) swells so much that they start facing problems in the efficient deployment of available corpus, that’s the time when problem occurs —eventually, they tend to lose focus and start delivering a below par performance. On the other hand, when the mutual fund houses stop accepting new investments in a scheme, soon realizing the scheme’s AUM has grown beyond a certain capacity to manage it efficiently; you as an existing investor would stand to benefit as far as the risk-return trade-off goes. Cases wherein the AUM is the primary driver for the change in the fundamental attributes, you must carefully notice how the fund house is responding to that, before taking any action in haste. At times, you will observe mutual fund schemes lowered the number of stocks in their portfolios. Adopt the ‘wait-and-watch’ attitude and don’t rush to conclude that a scheme has become riskier. You would appreciate that beyond a point, diversification adds no value. So if your portfolio retreats its exposure from 55 stocks to 40 stocks, it doesn’t necessarily mean the fund manager is playing Russian roulette. Often, in the absence of investment opportunities or in the down trending markets, having more stocks in a portfolio can work against your financial wellbeing. Although there’s no magic number, various studies show that any number between 20 and 30 is good enough to provide you adequate diversification. Therefore, closely monitor the volatility and the performance of the scheme post changes, before you make up your mind to redeem your investments. Sometimes in the pursuit of earning high returns or alpha, fund managers take undue risks — for example, in case of a debt mutual fund scheme investing heavily in inferior quality credit instruments. Be careful of that, because the primary objective of any debt oriented scheme is rarely to maximise gains and hence, the quality of the debt papers held in the portfolio is important. In a nutshell… Therefore, if you notice any change in the fundamental attributes of a mutual fund scheme, do revisit the Scheme Information Document (SID) to find out if the modifications are consistent with the original mandate. When there’s a fundamental change in the scheme, it is rarely that you will need to take any immediate action. And, exiting a scheme in a hurry can sometime prove to be a really bad choice. So what should you ideally do under such circumstances? Well, here are three tips that help:

Do nothing beyond taking a note of the changes, at least initially

Try to analyse the impact over time

Take action, only if necessary

It's more about psychology than about fundamentals alone…

Personal finance, many of you would agree is behavioural. Many a times, actions or decisions are guided by emotions rather than prudence.

Revisiting the fundamentals can be worthy exercise, only avoid myopic conclusions, or you may take a wrong turn.

Think about it…and apply logically in the interest of your long-term financial wellbeing.

To help you achieve your financial goals that are 7-8 year away from now,

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This post on " 3 Things To Do When A Mutual Fund Scheme Changes Fundamental Attributes " appeared first on "PersonalFN"

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Here’s How To Invest In Mutual Funds In The Name Of A Minor

Do you remember your parent’s monthly visits to bank or post-office? Or did you have an agent/relationship manger visiting home each month? Whichever way your parents saved every penny for your future, they strived to provide you a bright future. In most cases, they saved money in recurring or fixed deposits. And now that you are a parent, you wish to do the same for your child. Isn’t It? You wish to provide the best for your child — education, health-care, and lifestyle. You intend to secure your child’s future in every possible way. And because they mean the world to you; you are willing to save and invest in the best available financial instruments. As the interest rates are on a downward trend, fixed and recurring deposits have lost their sheen. It is possible that you prefer investing in other instruments like mutual funds. But, did you know that now you can invest in mutual fund schemes for your minor child (individuals below 18-years of age)? Yes, you heard it right. Minors can also invest in mutual fund schemes. Parents or a legal guardian can invest and transact in mutual fund schemes on behalf of a minor child.

What is Mutual Fund?

A mutual fund scheme, as the name suggests, is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds, short-term money-market instruments, other securities or assets, and/or a combination of these investments. To learn more about mutual funds watch this video:

Now, you can either opt for Lump Sum Investment, Systematic Investment Plan or Systematic Transfer Plan as per your convenience. Well, all three are sensible modes to invest in mutual fund schemes. Let’s find out how to invest for Minors:

Lump Sum Mode

If you have a big sum of say Rs 1 lakh in your bank account which you want to keep aside for your child’s future say higher education or marriage. Consider investing this corpus via the lump sum investment mode. And if you have a long-term horizon of more than five years, it would be best to opt for an equity mutual fund. Equity as an asset class in the past has out performed most of the other asset classes. And investing in equity mutual fund schemes will indirectly give exposure to equity. This gives you an edge over debt mutual fund to create wealth and beat the inflation bug. But beware! Investing all your money at one point, may call for market risk. And so, to reduce this risk, there are options called SIPs and STPs.

Systematic Investment Plan Mode

You can invest in a Systematic Investment Plan of a mutual fund scheme with a minimum Rs 500 a month. So, if you do not have large investible surplus, this gives you the opportunity to start investing a little every month in a mutual fund scheme for your minor child. Simply put, a SIP refers to Systematic Investment Plan which is a mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk. As parents, you strive to provide sound education to your child. And to fulfil this financial goal (among many others), investing in SIPs of the best mutual fund schemes is a prudent approach to follow. And remember, the earlier you begin the better it is. With a longer time-horizon on your side, the power of compounding works better. It is the case of an early bird getting a bigger worm — in personal finance parlance, building a bigger corpus to achieve the financial goal(s). You can use our Mutual Fund Calculator for lump sum and SIP Calculator to calculate future returns on your mutual fund investments.

Systematic Transfer Plan Mode

Under STP, a lump sum amount you invested in a fund earlier can be transferred at regular intervals systematically in a piecemeal manner into another mutual scheme (as desired by you) of the same mutual fund house. In today’s dynamic market scenario, while one may aim to take advantage of the favourable weather in both equity and debt markets, there is an inherent risk involved. Thus, when taking exposure to these respective asset classes, it is important to adopt a cautious approach, and proceed smartly and prudently. You can use our STP Calculator to calculate your returns. And what are the documents required?

Documents required for Minor to make a MF investment

Well, documentation in this case is simple. Proof of Age of Minor: You need to submit a valid document for proof of your child’s age, i.e. a copy of the birth certificate. Proof of Relationship: You need to provide documents which states guardian’s (natural/ legal) relationship with the minor. Documents of Guardian: It is mandatory for the guardian to comply with KYC regulations. Bank Account Details: If the investment will route through your account (as a parent / guardian), you will need to provide your bank account details. And, submit the Third-Party Declaration Form along with your bank’s acknowledgement letter. Alternatively, you can directly route these transactions through your child’s bank account, but furnishing the bank’s acknowledgment letter is a must.

What happens when your child turns 18?

As the funds are in your child's name, you do not have the authority to redeem the fund once your child becomes a major. So, the first step is to complete his/her PAN and KYC formalities. And change his/her bank account to the status of a major from minor. Your SIP instruction will be valid only until the day your child attains majority even if your SIP is perpetual.

So, is it a wise choice to invest in your child’s name?

If you wish to avoid unnecessary paper work and rigmarole, refrain from investing in your child’s name. Instead, invest in your name as a parent/guardian in respective mutual fund schemes and nominate your child as a nominee. You can also become a joint-account holder and transact as and when needed. This will simplify the formalities and make it easier to manage it. Holding funds in your name will give you more flexibility to modify the portfolio if needed. But if the funds are in the name of minor son/daughter, reallocation has to be with your child's consent once his/her age turns major. Also, the funds will be directly transferred to your child's bank account and hence, you will not have any control on it. Hence, joint account holding will give you flexibility and control over your investments.

Tax Advantage for parents

If you make investments in Equity Linked Savings Scheme, you can enjoy tax benefits under Section 80C of Income Tax Act 1961. Whereby your taxable income is reduced by the amount equivalent to your investments. Parents/guardian can claim up to Rs 1.5 Lakh under Section 80C. Additionally, if you invest in taxable instrument in the name of your minor child, you can claim an annual exemption of up to Rs 1500 per child under Section 10 (32) of the Income Tax Act, 1961. For instance, interest income for a year is Rs 7000, then as a parent/guardian you can claim for an exemption up to Rs 1500 and this reduces your taxable income by same amount. From a tax point of view any income/gains earned from investments will be added to your income. And so, you do not receive an additional tax advantage.

To Conclude

Investing in mutual fund schemes for minors can be a disciplined approach to investing towards achieving their future goals. However, it does not offer any additional advantage/incentive to mutual fund investing for minors. So, be wise while you’re planning to invest in mutual funds for your child’s future. Make the right, smart decisions and avoid getting carried away with emotions. Evaluate your needs, goals, and life plans before signing a cheque. Nothing wrong in making investments on behalf of your child, but remember this folio will not be operable once your child attains majority. You can instead choose to invest the same money on your name with specific life goals for the long term. Choice is yours, hence, choose wisely! Happy Investing!

Try our SIP Calculator to find future value of your SIP contributions.

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