Many people ask me this question….”Should we invest in our child’s name?”.  The answer is not so clear.

Legally speaking it does not matter whether you invest in your name or in your child’s name. Once upon a time when taxation was a consideration, creating many folios made sense. Today with tax not being a consideration, does it make sense to invest in your child’s name?

In my view, yes.

Start a SIP as soon as the child is born or as soon as you get your child a bank account. It is of course fine to invest from your account too. So start the SIP from your child’s account. Of course he/she does not have any income, but you will use your money to create a corpus for the child.

From time to time whatever gifts they get should also go into that account…and the child should see that statement on a REGULAR basis. When the post comes HOME in his name he will be proud that he gets some post – just like the older people. Tell him that this money is being created for a corpus – but he is allowed to have fun with Rs. 2000 once a year. See whether he wants to withdraw it. Most of the times they do not. It feels like “their” money. So when a slightly less justified demand comes up – just hint that the money will come from that account. In many cases, the  demand for that product will be postponed or cancelled.

Value systems, money, concentration, patience, cooking, …are skills which parents have to teach. Do not adbidcate your duty. Nobody else will teach your child how to save money. Or how to invest. My daughter said “why should my money be in bank fixed deposit when it can earn better in shares”. I said “there is risk”. She said “Even if I were to lose it all, you will give it to me – so the risk is on YOU, not me”.

Amar Pandit’s book taught her about risk, and now she has started doing some reading. She knows that ‘her money’ or whatever it means is in Franklin Bluechip, I Pru discovery,  Hdfc Euity, Hdfc Child plan (Inv) and a couple of ULIPs. That should take care of her education for sure assuming she goes abroad for her post graduation. However, she never ever suggests removing that money to buy something which she wants. No, she will not think of buying an I Phone with ‘her’ money. To be fair she has not asked for an IPhone even with my money!!

So forget the ‘legal’ necessity to keep money in children’s names, it makes sense from a teaching point of view. Do remember it gives the kids to walk out at age 18 and claim all the amount. Hopefully, it will not happen, but make sure that the amount that you have in children’s names is not too much – tempting them to walk out, and you not having money for yourself!!

 

 

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  1. Not much (but better than zero), but a small tax exemption is actually there.
    If the parents invest in a taxable investment in the name of the child, they can claim an annual exemption of Rs 1,500 per child under Section 10 (32) of the Income Tax Act, 1961.
    Say, the interest income in a year is Rs 6,500, the parents can claim exemption up to Rs 1,500 and add the balance of Rs 5,000 to their income.

  2. Hakunamatata,

    Adding to what Amit said, 1500 over a period of time will be something if not nothing.

    Also one can apply for IPO such as Dmart CDSL and if luck favours will be an added bonus in the kitty.

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