#mutualfundscheme

It is common sense to revisit basics when a/the circumstance/s has changed and you think you’ve taken a wrong turn. Imagine this… Your friend referred a doctor, who enjoyed a reputation for being one of the sharpest minds in the industry, to you. Lately, however, you noticed he’s devoting less time to his regular patients, including you, and busier with more critical cases. Many a times when you visit him for health concerns, you don’t even get a chance to speak with him; and, his support staff is obliged to “entertain” you. At some point, wouldn’t you reconsider continuing to subscribe to this doctor? Wouldn’t you ask yourself why, in the first place, you started to consult this renowned medical professional? This is defined as’ revisiting the basics’, and you may not agree, but this is an important exercise to ensure you are on the best path for your wellbeing. If this instance makes sense to you, then revisit basics when it comes to your mutual funds too! After all, fund managers are no less than your financial surgeons. They make sure your mutual fund investments are in good health. Of late, it’s been experienced that, many mutual fund schemes have changed their fundamental attributes. A change in primary attributes may rarely necessitate any action. For example, after the regulator allowed mutual funds to invest in Real Estate Investment Trusts (REITs), certain schemes altered the asset allocation mandate, such that it specifies an allocation to REITs as well. However, this amendment just provides an enabling power to the fund and may not necessarily translate into investments in REITs. So avoid jumping to conclusions. A change in the investment mandate is a fundamental shift, but it would be imprudent to redeem your mutual fund schemes, thinking your fund manager will exercise the option right away, and this could hamper your investment returns. First observe, whether the change in the primary attributes of a scheme is being introduced to offer more flexibility or will it eventually affect the functioning of the mutual fund scheme. For instance, if the investment mandate is moving from an aggressive to conservative, then maybe, you need revisit the fund as it could have a bearing on your asset allocation, impede the investment objective, and may be out-of-sync with your risk profile while you endeavour to achieve certain financial goals. Alternatively, you can always seek the assistance of a Certified Financial Guardian in such cases for this purpose,. However, some changes in the working of mutual fund schemes are inevitable and mostly occur because of technical factors. For example, a midcap fund may suddenly start carrying a large-cap dominated portfolio. This event is possible if the valuations in the mid and small cap segment are expensive. Under such circumstances check out if the fund manager alters the allocation between midcaps and largecaps within the mandated allocation limits. Keep cool if you find the change is within the mandated allocation limits. But if allocations have gone askew and continue to remain, then that should be a cause of concern. Sometimes, micro and small-cap funds deliver stunning returns when they are smaller in size. But riding this success, when their Asset Under Management (AUM) swells so much that they start facing problems in the efficient deployment of available corpus, that’s the time when problem occurs —eventually, they tend to lose focus and start delivering a below par performance. On the other hand, when the mutual fund houses stop accepting new investments in a scheme, soon realizing the scheme’s AUM has grown beyond a certain capacity to manage it efficiently; you as an existing investor would stand to benefit as far as the risk-return trade-off goes. Cases wherein the AUM is the primary driver for the change in the fundamental attributes, you must carefully notice how the fund house is responding to that, before taking any action in haste. At times, you will observe mutual fund schemes lowered the number of stocks in their portfolios. Adopt the ‘wait-and-watch’ attitude and don’t rush to conclude that a scheme has become riskier. You would appreciate that beyond a point, diversification adds no value. So if your portfolio retreats its exposure from 55 stocks to 40 stocks, it doesn’t necessarily mean the fund manager is playing Russian roulette. Often, in the absence of investment opportunities or in the down trending markets, having more stocks in a portfolio can work against your financial wellbeing. Although there’s no magic number, various studies show that any number between 20 and 30 is good enough to provide you adequate diversification. Therefore, closely monitor the volatility and the performance of the scheme post changes, before you make up your mind to redeem your investments. Sometimes in the pursuit of earning high returns or alpha, fund managers take undue risks — for example, in case of a debt mutual fund scheme investing heavily in inferior quality credit instruments. Be careful of that, because the primary objective of any debt oriented scheme is rarely to maximise gains and hence, the quality of the debt papers held in the portfolio is important. In a nutshell… Therefore, if you notice any change in the fundamental attributes of a mutual fund scheme, do revisit the Scheme Information Document (SID) to find out if the modifications are consistent with the original mandate. When there’s a fundamental change in the scheme, it is rarely that you will need to take any immediate action. And, exiting a scheme in a hurry can sometime prove to be a really bad choice. So what should you ideally do under such circumstances? Well, here are three tips that help:

Do nothing beyond taking a note of the changes, at least initially

Try to analyse the impact over time

Take action, only if necessary

It's more about psychology than about fundamentals alone…

Personal finance, many of you would agree is behavioural. Many a times, actions or decisions are guided by emotions rather than prudence.

Revisiting the fundamentals can be worthy exercise, only avoid myopic conclusions, or you may take a wrong turn.

Think about it…and apply logically in the interest of your long-term financial wellbeing.

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Do you remember your parent’s monthly visits to bank or post-office? Or did you have an agent/relationship manger visiting home each month? Whichever way your parents saved every penny for your future, they strived to provide you a bright future. In most cases, they saved money in recurring or fixed deposits. And now that you are a parent, you wish to do the same for your child. Isn’t It? You wish to provide the best for your child — education, health-care, and lifestyle. You intend to secure your child’s future in every possible way. And because they mean the world to you; you are willing to save and invest in the best available financial instruments. As the interest rates are on a downward trend, fixed and recurring deposits have lost their sheen. It is possible that you prefer investing in other instruments like mutual funds. But, did you know that now you can invest in mutual fund schemes for your minor child (individuals below 18-years of age)? Yes, you heard it right. Minors can also invest in mutual fund schemes. Parents or a legal guardian can invest and transact in mutual fund schemes on behalf of a minor child.

What is Mutual Fund?

A mutual fund scheme, as the name suggests, is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds, short-term money-market instruments, other securities or assets, and/or a combination of these investments. To learn more about mutual funds watch this video:

Now, you can either opt for Lump Sum Investment, Systematic Investment Plan or Systematic Transfer Plan as per your convenience. Well, all three are sensible modes to invest in mutual fund schemes. Let’s find out how to invest for Minors:

Lump Sum Mode

If you have a big sum of say Rs 1 lakh in your bank account which you want to keep aside for your child’s future say higher education or marriage. Consider investing this corpus via the lump sum investment mode. And if you have a long-term horizon of more than five years, it would be best to opt for an equity mutual fund. Equity as an asset class in the past has out performed most of the other asset classes. And investing in equity mutual fund schemes will indirectly give exposure to equity. This gives you an edge over debt mutual fund to create wealth and beat the inflation bug. But beware! Investing all your money at one point, may call for market risk. And so, to reduce this risk, there are options called SIPs and STPs.

Systematic Investment Plan Mode

You can invest in a Systematic Investment Plan of a mutual fund scheme with a minimum Rs 500 a month. So, if you do not have large investible surplus, this gives you the opportunity to start investing a little every month in a mutual fund scheme for your minor child. Simply put, a SIP refers to Systematic Investment Plan which is a mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk. As parents, you strive to provide sound education to your child. And to fulfil this financial goal (among many others), investing in SIPs of the best mutual fund schemes is a prudent approach to follow. And remember, the earlier you begin the better it is. With a longer time-horizon on your side, the power of compounding works better. It is the case of an early bird getting a bigger worm — in personal finance parlance, building a bigger corpus to achieve the financial goal(s). You can use our Mutual Fund Calculator for lump sum and SIP Calculator to calculate future returns on your mutual fund investments.

Systematic Transfer Plan Mode

Under STP, a lump sum amount you invested in a fund earlier can be transferred at regular intervals systematically in a piecemeal manner into another mutual scheme (as desired by you) of the same mutual fund house. In today’s dynamic market scenario, while one may aim to take advantage of the favourable weather in both equity and debt markets, there is an inherent risk involved. Thus, when taking exposure to these respective asset classes, it is important to adopt a cautious approach, and proceed smartly and prudently. You can use our STP Calculator to calculate your returns. And what are the documents required?

Documents required for Minor to make a MF investment

Well, documentation in this case is simple. Proof of Age of Minor: You need to submit a valid document for proof of your child’s age, i.e. a copy of the birth certificate. Proof of Relationship: You need to provide documents which states guardian’s (natural/ legal) relationship with the minor. Documents of Guardian: It is mandatory for the guardian to comply with KYC regulations. Bank Account Details: If the investment will route through your account (as a parent / guardian), you will need to provide your bank account details. And, submit the Third-Party Declaration Form along with your bank’s acknowledgement letter. Alternatively, you can directly route these transactions through your child’s bank account, but furnishing the bank’s acknowledgment letter is a must.

What happens when your child turns 18?

As the funds are in your child's name, you do not have the authority to redeem the fund once your child becomes a major. So, the first step is to complete his/her PAN and KYC formalities. And change his/her bank account to the status of a major from minor. Your SIP instruction will be valid only until the day your child attains majority even if your SIP is perpetual.

So, is it a wise choice to invest in your child’s name?

If you wish to avoid unnecessary paper work and rigmarole, refrain from investing in your child’s name. Instead, invest in your name as a parent/guardian in respective mutual fund schemes and nominate your child as a nominee. You can also become a joint-account holder and transact as and when needed. This will simplify the formalities and make it easier to manage it. Holding funds in your name will give you more flexibility to modify the portfolio if needed. But if the funds are in the name of minor son/daughter, reallocation has to be with your child's consent once his/her age turns major. Also, the funds will be directly transferred to your child's bank account and hence, you will not have any control on it. Hence, joint account holding will give you flexibility and control over your investments.

Tax Advantage for parents

If you make investments in Equity Linked Savings Scheme, you can enjoy tax benefits under Section 80C of Income Tax Act 1961. Whereby your taxable income is reduced by the amount equivalent to your investments. Parents/guardian can claim up to Rs 1.5 Lakh under Section 80C. Additionally, if you invest in taxable instrument in the name of your minor child, you can claim an annual exemption of up to Rs 1500 per child under Section 10 (32) of the Income Tax Act, 1961. For instance, interest income for a year is Rs 7000, then as a parent/guardian you can claim for an exemption up to Rs 1500 and this reduces your taxable income by same amount. From a tax point of view any income/gains earned from investments will be added to your income. And so, you do not receive an additional tax advantage.

To Conclude

Investing in mutual fund schemes for minors can be a disciplined approach to investing towards achieving their future goals. However, it does not offer any additional advantage/incentive to mutual fund investing for minors. So, be wise while you’re planning to invest in mutual funds for your child’s future. Make the right, smart decisions and avoid getting carried away with emotions. Evaluate your needs, goals, and life plans before signing a cheque. Nothing wrong in making investments on behalf of your child, but remember this folio will not be operable once your child attains majority. You can instead choose to invest the same money on your name with specific life goals for the long term. Choice is yours, hence, choose wisely! Happy Investing!

Try our SIP Calculator to find future value of your SIP contributions.