With the cost of higher education estimated to rise by as much as 10-12% annually, parents are keen to build a corpus for their child’s higher education gradually. Many of them want to do this using mutual funds by contributing in the child’s name.

CAN A MUTUAL FUND INVESTMENT BE MADE IN A CHILD’S NAME?
Yes. Mutual funds accept investments in the name of a minor (below 18 years of age) in any scheme-equity, debt, hybrid, gold/silver, or international funds. However, in such a folio, the child will be the first and sole holder, and no joint holders are allowed. The guardian must be either of the parents (father or mother) or a court-appointed legal guardian. The guardian manages the account until the child reaches the age of majority, after which the child gains control.

HOW DOES THIS WORK? WHAT DOCUMENTATION IS REQUIRED?
For a mutual fund investment in a child’s name, one must submit a valid document as proof of the child’s age and the parents’ relationship with the child. Fund houses accept documents such as a birth certificate or passport copy, which establish both the date of birth of the minor and the guardian’s relationship (natural or legal). These documents need to be provided while making the first investment or opening a folio. In addition, the guardian must be compliant with KYC regulations. Investments can be routed either through the child’s bank account or the parents’ bank account.

WHAT TRANSACTIONS CAN BE DONE IN A CHILD’S MUTUAL FUND ACCOUNT?
All transactions lump sum investments, systematic investment plans (SIPs), systematic transfer plans (STPs), switches – can be done in the child’s account, operated by the guardian. This will continue until the child attains majority.

WHAT HAPPENS WHEN THE CHILD TURNS 18?
When the child turns 18, all existing SIPs/STPs in the folio will be suspended. The folio will be frozen for operation by the guardian from the date the minor attains majority. Once the child turns 18, he or she must independently operate the account. The minor must submit, on attaining majority, an application form along with prescribed documents to change the status of the folio from ‘minor’ to ‘major’. The child who is now a major will need to have a PAN card and need to be KYC compliant.

WHAT ARE THE ADVANTAGES OF INVESTING IN A CHILD’S NAME?
● Investing in the name of a child enhances the discipline of the parent or guardian. It makes them more consistent and also, more on towards achieving the financial goal. Once you are emotionally attached to the investment, withdrawing from the fund will be the last thing on your mind.

● Also, it’s not just parents or guardians. Having a separate investment account in the name of a child makes him/her more aware regarding financial responsibilities. The feeling of owning an investment product from an early age inculcates a saving habit in the child. The child can consider mutual fund investment as his/her piggy bank and save accordingly.

● More importantly, mutual fund investment for the long term will increase the tax efficiency of the taxpayer. Till the time a child is a minor, any capital gains out of the mutual fund investment will be taxed as per the parent’s or guardian’s tax slab. Once the minor turns above 18, the capital gain tax will be in the hands of the child. Moreover, after the age of 18, the child might be in a comparatively lesser income tax bracket than that of a parent or a guardian. Therefore, the tax liability on the minor would be nominal.

WHAT ARE THE DISADVANTAGES OF INVESTING IN A CHILD’S NAME?
● Once the child has turned 18, you will need to change the status of the investment account from minor to major. It is important to do it, otherwise, the account will be restricted from future transactions.

● Also some parents worry that once the child turns 18, he or she will be able to operate the account independently, leading to a loss of parental control over the investments. They fear that at such a young age, seeing a large corpus could tempt the child into misusing it.

Make an informed decision when it comes to your child’s future. Always remember, what works for someone else may not work for you. Hence, invest as per your comfort.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.

WHAT ARE FLEXI-CAP FUNDS?

Flexi-cap funds give fund managers the freedom to invest across the market spectrum—large, mid, or small-cap stocks —without the rigid allocation rules of other categories. The only mandate is that at least 65% of the portfolio must stay in equities and equity related instruments. This flexibility allows the fund manager to chase opportunities wherever they see value, with the liberty to pick a benchmark that best reflects the scheme’s strategy.

HOW ARE FLEXI-CAP FUNDS DIFFERENT FROM OTHER EQUITY CATEGORIES, INCLUDING MULTI-CAP FUNDS?
Unlike large-, mid- and small-cap funds that are bound by strict allocation rules, flexi-cap funds give managers the leeway to invest across the entire market without restrictions. Multi-cap funds may look similar, but they too have a fixed mandate: they must allocate at least 25% each to large, mid and small caps. Large-cap funds must invest at least 80% in the top 100 companies by market value, while mid-cap funds are required to put 65% into firms ranked 101–250 and small-cap funds 65% into those ranked 251 and below. In comparison, flexi-cap funds face no such constraints, allowing managers to move across large-caps, mid-caps and small-caps depending on the market conditions. This flexibility is what has made them popular among investors.

WHO SHOULD INVEST IN FLEXI-CAP FUNDS?
Flexi-cap funds are suited for long-term equity investors or first-timers with a moderate risk appetite who want exposure to Indian equities without the hassle of picking individual stocks. They work well as a core portfolio holding for those seeking just one diversified fund where the manager decides the mix across large-, mid- and small-caps to balance risk and volatility. Investors planning to build wealth steadily through systematic investment plans (SIPs) can also consider this category.

WHAT ARE GILT FUNDS?
Gilt funds are debt mutual funds that invest mainly in government bonds. Since these bonds are backed by the government, they are very low-risk, making gilt funds a safer option for conservative investors. The portfolio of these schemes is a mix of government securities with different maturities.

HOW DO GILT MUTUAL FUNDS WORK?
To meet its borrowing needs, the central and state governments raise money by issuing government securities (G-Secs) through the Reserve Bank of India (RBI). Gilt mutual funds invest in these G-Secs. The government pays interest during the tenure of the security, and when it matures, the fund receives the principal back.

WHO SHOULD INVEST IN GILT FUNDS?
Aggressive fixed-income investors who believe interest rates have peaked and may fall over the next 9-12 months can consider accumulating gilt funds in their portfolio. A decline in interest rates typically pushes up the NAV of long-duration gilt funds, leading to capital appreciation.

HOW DO THESE FUNDS MAKE GAINS FOR INVESTORS?
Gilt funds earn returns in two ways. First, they receive interest income from the government on the securities they hold. Second, gilt funds can make capital gains by actively buying and selling government securities. Since bond prices and interest rates move in opposite directions, funds benefit when interest rates fall. That’s when bond prices move up, resulting in capital gains.

WHAT ARE THE RISKS?
When interest rates go up, bond prices fall, which can lower returns or even cause losses if the fund sells the securities before maturity. An yields on the 10-year benchmark government bond moved up from 6.3% to 6.6%. This resulted in a fall in prices of government bonds, resulting in mark-to-market losses in gilt funds. There are, however, no default risks in gilt funds because of the sovereign guarantee.

HOW ARE GILT FUNDS TAXED?
Gilt funds are treated like other debt mutual funds for tax purposes. If you choose the growth option, tax is levied only when you redeem your investment. For investments made on or after April 1, 2023, any gains are added to your income and taxed as per your applicable income tax slab.

What are the options available to a mutual fund investor?

There are three primary options available:

• ‘growth’,
• ‘dividend’ and
• ‘dividend reinvestment’.

If no choice is exercised at the time of application, the fund house will select the default option for that scheme as mentioned in the application prospectus.

How does the dividend option work?

Under this option, you will get paid from the profits made by the fund. Most debt schemes aim to pay a monthly dividend. In the case of equity-oriented schemes, a dividend is declared as and when there is a surplus. An important point to note: dividends in mutual funds are not guaranteed. In the dividend reinvestment option, dividend is not paid to the investor, but is used to buy more units of the same scheme.

What happens to the NAV when dividend is paid?

This dividend gets deducted from the net asset value (NAV) of the scheme. For example, if your scheme has an NAV of Rs 25 and the fund house declared a 10% dividend (Rs 1 on a face value of Rs 10 per unit), the NAV will decline by Rs 1 to Rs 24 after paying the dividend. The NAV goes down to the extent of dividend paid. Investors, who need a regular income, choose this option. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.

What happens under the growth option?

In this option, the scheme does not pay any dividend but continues to grow. If the fund buys or sells stocks and makes a gain, the amount is reinvested into the scheme. This gain is captured in the NAV, which rises over time. If your aim is to build long-term wealth, then the growth option would be the right choice.

With the tax-saving season having begun, many people are thinking of investing in equity-linked saving schemes (ELSS), where they can get equity-like returns along with the benefit of tax saving.

Here is a look at some of the key characteristics and benefits of ELSS:

Benefit of tax saving: Tax Benefit under section 80c of the Income Tax Act can be availed through ELSS upto Rs 1.5 lakh per year by either SIP or Lumsum

Shortest lock-in period: ELSS has the lowest lock-in period of 3 years as compared to other investment avenues.

Discipline savings & potential of high returns: Besides giving tax benefits, ELSS also leads to ‘forced savings’ because of the lock-in. This allows investors to earn market-based benefits over a longer period of time. Returns are more likely to beat the inflation unlike some of the other tax-saving schemes.

No minimum and maximum investments limit: ELSS funds have a lower threshold of Rs 500. Even a one-time investment of Rs 500 can be held till perpetuity. There is also no maximum limit specified for investing in ELSS. However, the tax savings are available on a maximum of Rs 1.5 lakh per year.

In a nutshell, for wealth enhancement and savings for tax exemptions, ELSS could be a preferred choice.

What is Systematic Transfer Plan (STP)?

Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from one category of fund to another, usually from debt funds to equity funds. Investing a lump sum amount in stocks or equity mutual fund could be dicey for the investor as equity markets are volatile and returns in equity mutual fund is linked to the performance of stock market. Systematic Transfer Plan helps to keep a balance of risk and return.

BENEFITS OF STP

1. Consistent return – Money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt fund are higher than returns from savings bank account and assure relatively better performance

2. Averaging of cost – STP has some integral features of systematic investment plan (SIP). Similar to SIP every month an amount is invested in an equity fund. One of the differences between STP and SIP is the source of investment. In case of the STP, money is being transferred from a debt fund and in case of SIP, from investor’s bank account. Since it is similar to SIP, STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price

3. Rebalancing portfolio – An investor’s portfolio should be balanced between equity and debt. STP helps in rebalancing the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund

How does STP work?

Say if a person wants to invest 60,000 amount in an equity fund through STP, he will have to first select a debt fund which allows STP to invest in that particular equity fund. After selecting the debt fund invest all the money that is 60,000 in the debt fund. Now you have to decide an amount which will be transferred from debt fund to equity fund and the frequency (i.e he may choose 10,000 amount to be transferred in 6 installments on a monthly basis).

Every month on the fixed date amount 10,000 will be transferred from the debt fund to the desired equity fund.

What are types of STP’S?

Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment

Capital Appreciation – The capital appreciated gets transferred to the target fund and the capital part remains safe

Flexi STP – Under Flexi STP investor have a choice to transfer variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market. If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval