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Most parents start thinking about investing for their child when school fees rise or college suddenly feels closer than expected. At that point, many end up buying products labelled “children’s plans” or insurance-linked schemes, assuming those are the only options. They aren’t.
You can invest in regular, low-cost direct mutual funds for your child. You just need to understand how the account is held, who controls the money, and what changes when your child turns 18.
What “investing for a child” actually means
Legally, a minor cannot own or operate a mutual fund account. That doesn’t mean they can’t be the beneficiary. It simply means an adult has to act as the guardian and manage the investment until the child becomes a major.
In practice, the investment is made in the child’s name, but operated by a parent or legal guardian. The money is earmarked for the child, even though the control stays with you for many years.
How to open a direct mutual fund account for a minor
When you invest for a child, the mutual fund folio is opened in the minor’s name, with one parent listed as the guardian. Only one guardian is allowed per folio.
The child’s documents are required, typically a birth certificate or passport. The guardian’s KYC, PAN, bank account and signature are used for transactions. The child does not need a PAN at this stage.
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Importantly, investments can only be made from the guardian’s bank account. Redemptions also flow back to the guardian’s account until the child turns 18.
If you are investing directly, this is done through the AMC website or an official direct platform, not through an intermediary.
Why direct mutual funds make sense for child investments
Direct mutual funds have lower expense ratios than regular plans. Over a 10-15-year horizon, that cost difference compounds into a meaningful amount.
When you’re investing for long-term goals like education or a start-in-life fund, costs matter more than convenience. There is no extra benefit in paying commissions through regular plans when the investment logic is straightforward.
Direct plans also make it easier to stay disciplined, especially if you use SIPs and avoid frequent churn.
Choosing funds for a child’s timeline
The right fund depends less on “child-specific” labels and more on how long the money will stay invested.
If the goal is more than 10 years away, equity-oriented funds usually make sense for a large portion of the portfolio. For goals that are closer, gradually reducing risk becomes important.
There’s no requirement to use a single fund. Many parents run one long-term equity SIP for college and another, more conservative investment for nearer expenses like higher secondary schooling.
What matters is aligning risk with time, not the age of the child today.
Tax treatment: what parents should know
This is the part many people miss.
Income from investments made in a minor’s name is generally clubbed with the parent’s income, typically the parent with the higher income. There is a small annual exemption, but beyond that, gains are taxed as the parent’s income.
This means investing in a child’s name does not automatically reduce taxes. The benefit is not tax arbitrage. It is goal clarity and long-term discipline.
Once the child turns 18, the clubbing stops. From that point onward, gains are taxed in the child’s hands.
What happens when your child turns 18
When the child becomes a major, the folio does not automatically convert. A simple “minor to major” process is required.
The child must complete KYC, submit PAN and bank details, and sign the necessary forms. After this, control of the investments transfers to the child. SIPs can continue, but the authority shifts.
This is an important moment. It’s also a good opportunity to involve your child in understanding how the investments work, instead of handing over a lump sum with no context.
Common mistakes parents make
One common mistake is mixing up ownership and purpose. Investing “for” a child does not mean the money cannot be touched earlier. Legally, the guardian controls it. This requires self-discipline.
Another mistake is overloading insurance-based child plans, which combine low returns with long lock-ins. A clean mutual fund portfolio is usually more flexible and transparent.
Some parents also forget to rebalance as goals approach, staying fully invested in equity even when the money is needed soon.
The real advantage of doing this early
The biggest benefit of investing directly for your child is not a special product feature. It’s time.
Starting early allows small, regular investments to compound quietly. It reduces pressure later. And it keeps your child’s future goals separate from your own retirement or emergency savings.
You don’t need complexity to do this well. A few direct mutual funds, started early and reviewed occasionally, can go a long way in building a meaningful financial base for your child.