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Should I Invest in SIPs for My Children's Future?

Ramalingam Kalirajan |7872 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Feb 06, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Neeraj on Feb 04, 2025Hindi

Is it wise to have SIP account opened in my childs name and payment is also made thru his own savings account, guardian is my wife. pls advice i have already taken few SIPs thru this route so that after both my child attain legal age they have sound financials, is this the right route to create long term wealth for my kids ?

Ans: You have taken a thoughtful step toward securing your children’s financial future. Investing in Systematic Investment Plans (SIPs) in their names can provide them with long-term wealth. However, there are important aspects to consider.

Ownership and Control of Investment
Since your child is a minor, the investment account is operated by the guardian.

Your wife, as the guardian, has control until the child turns 18.

After attaining majority, the child must update records for direct ownership.

SIPs continue but require KYC completion in the child’s name.

Taxation Impact of Investing in Child’s Name
Any income from these investments is clubbed with the parent’s income.

The income is taxed in the hands of the higher-earning parent.

Once the child turns 18, taxation applies individually in their name.

If SIPs are equity-based, long-term capital gains tax applies beyond Rs. 1 lakh.

For debt funds, capital gains tax is based on holding period and indexation.

Operational Challenges of SIPs in Child’s Name
Money deposited in a minor’s account must be legally justified as a gift.

Some banks restrict large SIP transactions from a minor’s account.

When the child turns 18, all investments need re-verification.

If KYC updates are not completed, redemptions and further investments may get blocked.

Alternative Approach for Child’s Future Wealth
Instead of opening SIPs in a child’s name, consider investing in your own name and earmarking funds for them.

You can maintain control without KYC changes later.

Taxation remains in your name until you transfer funds.

Flexibility to reallocate funds for child’s education, marriage, or other needs.

No requirement to re-submit documents when they turn 18.

Final Insights
You have chosen the right path by thinking about long-term wealth creation for your children. However, investing in your name with a clear allocation for their future can simplify taxation and operations. This also provides flexibility in managing funds as per future needs.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.