Planning your child’s future? Here’s how to invest via direct mutual funds

Most parents start giving serious thought to investing for their child when school fees climb steeply or college costs suddenly feel uncomfortably close. At that point, many gravitate towards products marketed as “children’s plans” or insurance-linked schemes, believing these are the only viable choices. However, parents can also invest in regular, low-cost direct mutual funds for their children, as long as they understand how such investments are set up and managed. 

Legal framework for investing in a child’s name 

According to the law, a minor cannot own or operate a mutual fund account. Instead, investments are made in the child’s name with a parent or legal guardian acting on the child’s behalf until the age of 18. While the investment is intended for the child’s future, the guardian retains full control over the account during this period. 

How to invest 

To invest through direct mutual funds, a folio is opened in the minor’s name with one parent designated as the guardian. Only one guardian is allowed per folio. The child’s basic documents, such as a birth certificate or passport, are required, while the guardian’s PAN, KYC, bank account details, and signature are used for all transactions. The child does not need a PAN at this stage. All investments and redemptions are routed through the guardian’s bank account until the child becomes a major. Direct investments are made through AMC websites or authorised direct platforms, without intermediaries. 

Why direct mutual funds work for long-term goals 

Direct mutual funds are often considered more suitable for long-term child-related goals because they carry lower expense ratios than regular plans. Over a 10-year to 15-year period, this cost advantage can meaningfully boost returns through compounding. For long-term goals such as higher education or a starter fund for adulthood, keeping costs low and investing steadily through SIPs is generally more effective than paying commissions embedded in regular plans. 

Choosing the right funds 

Fund selection should be guided by the investment horizon rather than labels like “child plans”. Equity-oriented funds typically suit goals that are more than a decade away, while risk should be reduced as the goal approaches. Many parents choose to run separate investments—one focused on long-term equity growth and another, more conservative, for nearer-term expenses. 

Tax considerations 

On the tax front, income earned from investments in a minor’s name is usually clubbed with the income of the parent in the higher tax bracket, subject to a small annual exemption. This means investing in a child’s name does not automatically result in tax savings. The real benefit lies in goal-focused, disciplined investing. Once the child turns 18, the clubbing provision ends and the income is taxed in the child’s hands.  

When the child attains majority, the mutual fund folio must undergo a “minor to major” conversion. The child needs to complete KYC, submit PAN and bank details, and sign the required forms, after which control of the investments shifts to them. This transition also offers parents an opportunity to introduce their child to basic personal finance concepts. 

Common pitfalls to avoid 

However, there are some common pitfalls such as over-reliance on insurance-based child plans with low returns and long lock-in periods, or failing to rebalance portfolios as financial goals draw closer.