How to invest for grandchildren?- Business News
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How to invest for grandchildren?

You can invest for your granchildren's future. Read on to find out about the different options in the market .

  • New Delhi,  February 26, 2016  
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Manas Gupta, 60, wants to make his granddaughter's first birthday special. He does not want to give her cash or write a cheque. He wants to invest in her name. "This is her first birthday. I want to invest for her education. I do not want to spend on expensive gifts," he says.

There are many people like Manas who want to leave a legacy for their grandchildren by investing money to give them a secure future. However, many times they just hand over money to the parents as they are not aware of the investment instruments that the grandchildren can access when they grow up.

There are several plans and policies in which one can invest in the name of grandchildren. But remember that for this, parents' signature and consent are must. We discuss ways by which you can leave a legacy for your grandchildren.

MUTUAL FUNDS

As it is a long-term investment, one can go for equity mutual funds, as equities give higher returns than other asset classes over long periods. For example, while mutual funds have given a return of 15 per cent a year over the last 10 years, gold has returned 8-10 per cent per year over the same period.

There are two ways to invest in a mutual fund scheme for one's grandchildren. First, one can invest in one's own name and make the child a nominee through a will. Second, one can invest in the name of the child as mutual funds are allowed to accept third-party cheques.

Anil Chopra, Group CEO & Director, Bajaj Capital, says, "A grandfather can invest in a scheme in the name of the child. But parents are also required to sign on the form." To invest in the name of a child, he or she should have a bank account. The child should be the first and sole holder in the folio. There are some child-specific mutual funds such as Axis Children's Gift Fund and HDFC Children's Gift Fund in which one can invest. But are these different from regular funds?

Ashwin Patni, Fund Manager and Head-Products at Axis AMC, explains. "Unlike other funds, our fund has a lock-in period so that parents cannot withdraw money until the child turns major." The fund invests most of the money in equities, and small portions in debt and money market instruments. The important point to remember is that minors are not allowed to manage the investment.

The account is operated by parents until the child turns major. Grandparents have no role to play at any stage after making the investment. The know-your-customer (KYC) procedure is carried out for grandparents as well as parents. Photocopies of supporting documents such as birth certificate of the minor are mandatory while opening the account. In case the court has appointed someone a legal guardian of the child, a notorised photocopy of the court order should be submitted along with the application.

The guardian cannot operate the account after the beneficiary turns major. Abhishake Mathur, Senior Vice President and Head, Investment Advisory Services for ICICI Securities, says, "At this stage, he or she has to go through the formalities for changing the account status from minor to major. This involves furnishing of PAN and bank account details, among other things."

Here is a list of documents required to change account status from minor to major in case of mutual funds:

  • Service request form, duly filled and containing details like name of major, folio number, etc.
  • New bank mandate
  • Signature attestation by the manager of a scheduled bank or a bank certificate
  • Application letter
  • KYC acknowledgement of the major. Watch out: When an investment is in the name of the minor, the redemption proceeds will go to only his or her account.

Ramalingam K., Director, Holistic Investment Planners, says, "When you gift an investment to a child, it becomes the asset of the child and you don't have any say in that."

INSURANCE

One can also buy insurance for the grandchild by making him or her a nominee. However, this requires written consent from parents. Pradeep Pandey, Chief Marketing Officer, Future Generali Life, says,"Parents' consent is needed for a grandparent to buy a policy for his grandchildren. Consent is a certification given by parents that they do not have any objection to it." Generally, only grandparents up to 60 years of age can buy a policy. After this, there is vesting period of 15 years. So, a grandparent who is 60 can continue the policy till only 75 years of age.

Chopra of Bajaj Capital says, "According to the rules, only parents can be guardians. So, if a grandparent wants to buy a policy, he can become a proposer. The child will be a nominee in the policy." Grandparents can also buy a life insurance policy in the child's name. However, no relative other than parents or grandparents is allowed to purchase a policy in the child's name.

But experts advise against buying policies with a child as life assured as it does not serve the purpose of securing her or his life financially. Once the child becomes a major, he can receive the maturity benefits after completing the necessary formalities. If not, the money flows into the account of the grandparent.

Aalok Bhan, Director, Products Solution Management & Customer Marketing, Max Life Insurance, says, "If a policy is purchased in the child's name where the life insured is the child, once the child turns major, the policy automatically vests in him or her. He or she becomes the owner of the policy and is eligible for all its living benefits. No living benefits can accrue to the child until he or she turns major.The death benefits will be paid to the nominee."

Watch out:

Charges in insurance policies are high compared with those in mutual funds. For older people, charges will be even more due to higher mortality charges. Moreover, experts suggest that one must not buy insurance policy in the name of the grandchild as it does not serve the purpose of offering protection to the child.

NATIONAL SAVING CERTIFICATE

If you do not intend to invest in equities, you can go for National Savings Certificate (NSC). NSC can be bought in the name of any minor irrespective of relation. NSC VIII Issue (five years) offers an interest rate of 8.5 per cent per annum. There is no cap on the investment. You can start from as less as Rs 100. NSC also qualifies for deduction under Section 80C for an investment up to Rs 1,50,000 per annum. On maturity, the certificate has to be signed by the child and attested by the guardian before it can be redeemed.

TAX IMPLICATIONS

Any income arising from the gift needs to be clubbed with the parents' incomes. The investments done by grandparents in the name of grandchildren are a gift and not liable to tax. Vineet Agarwal, Partner, KPMG in India, says, "Any income arising from such gifted amount will be taxable in the hands of the grandchild. However, if the grandchild is a minor, the income is clubbed with that of the parent whose taxable income is higher. Such parent shall be eligible for a deduction of Rs 1,500 from his or her taxable income."

He adds that most tax benefits provided under Section 80C are for expenses on self. At times they include expenses on spouse, children and guardian too. It seems the tax benefit may not be available to the grandparent.

On NSC, Agarwal says, the investment is generally for a period of six years. Interest is accrued annually and is reinvested into the scheme (except in the final year). Interest accrued is taxable every year and eligible for deduction under Section 80C. Hence, the maturity proceeds of NSC are not taxable. By starting saving early for your grandchildren, you can give them a decent start for a secure future.