What is the best way to give a child a financial gift?

Posted by: Arti Bhargava on Jan 08, 2018, 01.39 PM IST

Manisha is planning a gift for her granddaughter's 10th birthday. Though she knows the child hopes to receive a number of presents, she wants her gift to be financially meaningful and useful in future. While the easy option would be to transfer money into her son's account and inform him that it is to be used for the child's needs, she is not sure that it will actually be used in the way intended. Manisha wants to make sure the monetary gift is clearly set aside for her granddaughter's use. What is the best way to go about this?

Manisha's choice of investment will be driven by the time available before the invested money is required and the ability of the people who are going to manage the investment to monitor and make the right decisions. Since the funds are required only after more than five years, Manisha can well look at equity to provide capital appreciation.

A diversified equity fund is a good choice. An equity index fund is a good low cost choice if the investment style is likely to be uninvolved. A bank FD and bonds are simple, low risk products but with limited capital appreciation. The chances of the investment plan being abandoned will be high if Manisha ties her son to an investment that he may not be financially ready for. The investment should not require a periodic commitment of funds.

Manisha must make the investment naming her granddaughter as a minor investor with one of her parents as guardian. Manisha can directly provide funds for certain kinds of investments.For others, such as mutual funds, it may be necessary to route it through her son. The tax implication if the amount being gifted is more than Rs 50,000 and the income earned from the investment will have to be considered. Manisha can use this opportunity to introduce her granddaughter to the basics of finance.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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This article appeared in Economic Times dated Jan 08, 2018, 01.39 PM IST