Opening PPF Account for minor children

PPF account is one of the most favorite investment product in India and every person wants to open a PPF account for his minor child. However, there are lots of myths about the rules on opening PPF account for minor kids. In this article, we will look at some of the important points you should know if you want to open a PPF account for your children. We will discuss about tax exemption, limit on the amount you can invest and PPF maturity rules. Here they are

1. Who can open PPF account for minor Child ?

As per PPF rules, a guardian can open Public Provident Fund account for minor child, where guardian is

• Either Father or Mother
• Or incase of Parents are not alive, then any other guardian under the law can open PPF account for minor children, like Uncle, Aunt, Grandmother, Grandfather etc.
• Incase a surviving parent is incapable of acting, then also some other guardian (as mentioned above) can open PPF minor account

2. How much can I invest in PPF account of Minor Child ?

There is a very big confusion around this topic. The most common question is – “Can I invest more than 1 lac in PPF account ?”

As per my understanding and all the readings I did on this topic, I came to know that One can invest maximum of Rs 1 lac in all the combined PPF (Public Provident Fund) account a person has which is self , and for minor children. Example – Imagine there is a Father (F) and Mother (M) and there are two minor children – C1 and C2 . Now follow scenario’s are possible

• Father (F) can open PPF account for himself, C1, and C2
• Wife (W) can open PPF account for herself, C1 and C2
• Father can open PPF account for himself and C1 (or C2) , Wife can open PPF account for herself and C2 (or C1)

Here are these 3 scenarios possible

3. Can I deposit more than 1 lac in PPF account even if I don’t need income tax exemption ?

This is one question which really needs clarity, because a lot of people open PPF accounts for minor children and invest Rs 1 lac in all the Public Provident Fund accounts (Here are articles on opening PPF account with ICICI Bank and with SBI Bank). You don’t get income tax exemption under 80C for more than total Rs 1 lac, which is fine for many people, but are you eligible to get benefits on more than 1 lac invested or not ?

As per PPF rules, you are just not allowed to invest more than Rs 1 lac in your own PPF account or any other PPF account where you are guardian. So if you have 2 kids and you have opened PPF account in their names, you might be thinking that you can invest 1 lac in your own PPF and 1 lac in each kid PPF account so that you can enjoy tax free maturity income later for your kids PPF account . But I dont think its allowed, because as per PPF rules, the 1 lac limit is for an individual , not on per account basis .

But I have been investing more than 1 lac each year, already from many years !

I know, a lot of investors who have been investing more than 1 lac in PPF each year. Due to technological challenges, it might be possible that no one stopped you from doing it, but in future if govt comes to know that you have been avoiding the rules, you might not get any interest on the excess amount, so you might get back only the principal amount at the time of maturity. A lot of Bank staff are also not clear on these rules , here is an incident which was shared by one of our readers 

Today I met manager of the branch of bank (State Bank of India) where I have all these three accounts. I narrated the whole scenario. He does not see any problem with the situation. I am really confused as to continue this mode of financial plan or to change it in the light of your clarification regarding the total ppf investment limit.

4. Do I need to declare about my personal PPF accounts at the time of opening minor PPF ?

A person can not have more than 1 PPF account on self name, but they can have it as a guardian for his children , but you need to declare about all your PPF (Public Provident Fund) account as self and for other children at the time of opening a new PPF account with other kids. Because when you fill up the PPF opening form, there is a declaration you need to give about it , here is a snapshot of how it looks like

Which means that legally you need to declare about your other PPF accounts , if you don’t do so, you are breaking the law and if in future its detected that you have been doing what is not allowed, all the money you have deposited in PPF account in excess to the limit allowed will just be returned to you without any interest, and that might be a big blow to your overall planning.

So, a small change you can do in your overall planning is that, you can ask your spouse to open PPF account as guardian for the child, this way, one husband can avail upto 1 lac benefit and wife can also avail upto 1 lac benefit.

5. What happens when the minor kid becomes a major ?

Case 1 : If PPF account matures before the child attains 18 yrs - In this case the guardian can either withdraw the money from PPF or extend it for another 5 yrs block . In this case, the money withdrawn will be treated as guardian income and now when this money is invested somewhere else and any interest income is earned (learn how PPF interest is calculated), then it will be treated as guardian income only. So imagine PPF (Public Provident Fund) account is matured and the kid is still minor (assume you opened the PPF when he/she was 1 yr old) and you get Rs 10 lacs from PPF account, now when you invest this 10 lacs into FD , you get Rs 1 lac as interest in a year, this interest income will be treated as your income (guardian income) and will be added into income and taxed accordingly.

Case 2 : If PPF account matures after the child attains 18 yrs (become’s major) - In this case, the account will then be operated by the child (who has become major) and there will be no guardian. The child will then take his/her own independent decision. In this case, because the PPF account has matured after the child has attained maturity age, all the maturity amount will be income of the child itself, Now any interest income earned on this amount in future will be kid income.

Conclusion

PPF account for minor children is a good idea if you want to build a long term corpus for their education or other requirement. However if you are already exhausting your own limit for PPF (Public Provident Fund), then it might not be that useful because their a limit on the investment amount. You need to see how you want to divide the amount between your own and your kid and whom do you want to make guardian, yourself or your spouse ?

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 Are You Saving or Are You Investing

Are You Saving OR Are You Investing?

Many people often misconstrue savings with investments. But let us tell you that there is indeed a difference between the two.

Merely putting aside money under the mattress, or in a vault, bank locker or savings bank account after meeting your expenses and liabilities may not mean that money works for you.

In times where the inflation bug is eating into your earnings, you need to move a step forward and invest. More importantly, invest wisely!

By now many of you may have realized that there is indeed a difference between saving and investing. So let's delve a little deeper and understand the difference between the two...which can help us march forward in our journey of wealth creation.

Savings Meaning:

• An act of putting aside money after defraying expenses and liabilities (...therefore the unspent income results in savings)

Savings = Income - All expenses including obligations towards borrowed money



• It's an act of economising 
• In Personal Finance parlance:

Savings refers to preservation of wealth for future use


The Right Approach to Increase Savings

• Refrain from impulsive buying (...It is imperative to stick to your immediate priority. Have a list while you go out shopping and be rational while making the list.)
• Make a monthly budget (...Ascertain your income... frame the budget in a way that allows you to save more.)
• Economise on expenses (...try to avoid those expenses which aren't necessary)
• Avoid excessive borrowing / credit (So while you may own and use a credit card, use it thoughtfully knowing your means - Remember: excessive credit can lead to a debt trap!)
• Start saving at an early age (...it always helps to plan for your future. Remember, you can always postpone your decision to buy your favourite gadget, but you should save for a rainy day.)
• You may start small, but save regularly (....Remember, your every bit of savings canhelp you attain financial freedom)

Conclusive remark on savings: 

Now that we have seen the right approach to savings, the question is, can saving alone help you achieve your life's goals? - Which could be: buying your dream home, your dream car, yourchildren's education, their marriage, your retirement; amongst a host of other ones. 

Think about it. 

Do you know, over the years, the money that you have saved - kept aside in your vault, bank locker, savings account, or under the mattress - may lose value as the inflation bug eats into your savings if it is not allowed to grow at a decent pace? Therefore, in order for it to grow, you need to put your 'money saved' to productive use - and make money work for you! 

And what should you do to make money work for you? 

Well, the answer lies in INVESTING!


Investing Meaning:

• An act of laying out your 'money saved' for productive use with an expectation of earning return more than inflation to preserve purchasing power of money
• A process of making your 'money saved' work for you (instead of simply stacking in your vault / bank locker or under the mattress)

Advantages of Investing

• Can grow your savings
• Helps your money work for you since it is put to productive use
• Can help in countering inflation and maintain purchasing power of money (You see, as money tends to lose its value over time due to inflation - which eats into your hard earned savings - you can counter the inflation bug by investing and maintain the purchasing power of money for your future)
• You can achieve your financial goals in life (...which could be...buying a dream home, a car, taking care of children's education needs, their marriage and your retirementamongst a host of others)
• Helps wealth creation
• Provides a sense of financial security 

The Right Approach to Investing

• Understand your own risk tolerance (...if volatility makes you nervous then risky investments such as stocks and equity mutual funds may not be the ones for you. You then might as well invest in fixed income instruments instead, such as fixed deposits, PPF, etc.
• 
  
• Ascertain the risk involved while investing (...you see, every asset class - equity, gold, debt and real estate - has risk associated with it and therefore it is necessary to know about the same before investing your hard earned money)
• Know your investment objective (... It is important to know that there are various investment avenues which are meant to cater to respective investment objectives. So enough care should be taken while investing your hard earned money. Ideally each of your investments should match your investment objectives)
• Consider your age (...this can help you have the right investment instruments appropriate for your age)
• Consider the time period before you need money (...Remember: The longer you are away from the time you require your hard earned money, the more risk you can take, and hopefully even earn more by investing in risky asset classes.)
• Do sufficient research (...It is vital not to get carried away by exuberance and / or what your friends and family say. Instead, undertake solid fundamental research on respective investments, and please do not get caught up in hype....understand how the product works)

• Evaluate cost of investing (...Remember: gains can be easily eroded if you don't consider cost of investing and thus it is vital to keep an eye on terms and conditions associated with the investment avenue. Very often many indulge in trading in the stock market to make a quick buck without really understanding the associated costs they are paying for regular trading or churning)
• Aim at investing in investment products that can help you earn more than inflation(...if your investments manage to outpace inflation, it will help you achieve your financial goals smartly and efficiently)
• Recognize the tax implication (...this is important...after all, the objective is also to earn tax efficient returns. If you do not plan well, you may end up paying higher tax on your returns)
• Always start early (...as there are benefits of doing so. You can understand it well by taking a look at the following table and chart)

An Early Bird Gets A Bigger Pie
Let us take an example of 3 friends - Vijay, Ajay and San jay - All 3 had good jobs and wanted to retire at the age of 60. Vijay being the smarter of the lot, started planning for his retirement at the very initial stage, at 25, and invested Rs. 7,000 per month. Ajay realised the importance of planning for retirement once he was 30, while Sanjay could feel the guilt of being left out only when he was 35. See what they accumulated when they were on the verge of their retirement. 

Particulars	Vijay	Ajay	Sanjay
Present age (years)	25	30	35
Retirement age (years)	60	60	60
Investment tenure (years)	35	30	25
Monthly investment (Rs.)	7,000	7,000	7,000
Returns per annum	10%	10%	10%
Sum accumulated (Rs)	2,65,76,466	1,58,23,415	92,87,834

Disclaimer: The names and figures are fictitious and used for example purpose only.
Also, return per annum mentioned above is for illustration purpose only.

Not only this, they also noticed a wide deviation in the proportion of growth they saw on their invested corpus. While Vijay's money grew around 9 times, Ajay's money grew 6 times and Sanjay saw a growth of just 4 times



Disclaimer: The names and figures are fictitious and used for example purpose only.

Points to Remember for You to Save & Invest Wisely!
(Finally, to wrap-up this session of learning, here are some points one must keep in mind, now that you may have recognised why investing is imperative once you have saved)


To Save

• Do not splurge all what you earn...SAVE! (...Remember: It is important to economise on your expenses and save for a rainy day)
• It is never too early to save (...in fact, savings can help you feel financially secure and even sleep better at night)

• Start small but maintain the regularity 

While Investing

• Do not rush with investing (...undertake thoughtful research by doing a holistic study)
• Investing is a serious activity (...in fact, it could be essentially boring, and not exciting)
• Do not speculate (...while it can be a thrilling experience, it can be killing as well if the tide turns against you. So it is best not to fall for excitement and exuberance)
• Never use contingency funds to invest (...Remember, they are put aside as part of your savings to meet your requirements on a rainy day)
• Never invest from borrowed funds (...except in the case of investing in real estate or your own business; but again, while investing therein don't go beyond your means)
• Know your investment product (...understand how it works and undertake research; recognise the risk-reward relationship the product offers)
• Diversify (...Remember, this can help you reduce your risk to your overall portfolio if you diversify wisely)

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 Some Myths & Clarifications About Mutual Funds

 - Some Myths & Clarifications About Mutual Funds



 Mutual funds are an effective engine to route your investments in the securities market. They (mutual funds) offer several advantages over direct stock picking; such as... diversification, professional fund management, lower expenses, economies of scale, liquidity, etc. But despite all of this, very often we see investors surrounded by myths about investing in mutual funds.

In a world filled with information, we do recognise that many of us develop our own set of beliefs and judgements. But it is vital to recognise, whether we are living in plain truth or delusions.

In this session of Money Simplified, we would like to clarify some of the common myths on investing in mutual funds and endeavour to make you more informed, so that you can take prudent investment decisions.

You see, our experience shows that, the myths which many investors have about investing in mutual funds can be classified into 2 parts:

• Myths based on Incorrect Beliefs
• Myths based on Incorrect Facts

So let's understand each of them in detail... 


Myths based on Incorrect Beliefs

1. Mutual Funds Lack the Excitement
   Myth Clarified: The excitement can be done away with for long-term wealth creation through mutual funds.
   
   (...This is the common discourse that, which many have about investing in mutual funds. They say, they are dull and boring. Well, mutual funds may lack the excitement of the stock market, but it's the kind of excitement that investors can do without for the long-term health of their wealth. Mutual funds may not give an impetus to the investor's portfolio, in a bull run, like some 'exciting' stocks do. But you may be cushioned better, during the downside in the markets.)
2. Mutual funds are too Diversified 
   Myth Clarified: In fact diversification helps to reduces risk, while a concentrated portfolio elevates risk.
   
   (...Many investors believe that a stock portfolio of 8 to 10 stocks will generate a more attractive return than a mutual fund - which may hold more number of stocks. Many may argue that seasoned investors successfully manage a small portfolio over a long period of time. But, not too many investors can claim to have investment discipline, insight and experience. You see, a concentrated portfolio adds risk, while a well-diversified portfolio, mitigates risk.)
3. Mutual funds are Expensive 
   Myth Clarified: In fact they reduce your cost of investing
   
   (...Mutual funds on an average charge 2.25% to 2.50% of the daily net assets as a recurring expense which go towards meeting expenses like brokerage costs, custodial costs, fund management cost, etc. But some of these expenses are incurred by you as stock investor as well. In fact if you are frequently churning your stock portfolio; as an investor you are eventually paying much more.)

Myths based on Incorrect Facts

1. A Mutual Fund Scheme Invests in the Same Stocks as its Benchmark Index
   Myth Clarified: The benchmark index only serves the stated purpose i.e. benchmarking returns. It offers investors the opportunity to evaluate the fund's performance. It need not always construe that an actively managed mutual fund scheme would invest in stocks that form a part of the benchmark index.
   
   (...A number of investors believe that a mutual fund always invests in the same stocks that constitute its benchmark index. For example, if the S&P BSE Sensex is the benchmark index for a fund, then it is expected to invest in the same 30 stocks that form the S&P BSE Sensex. This is true only in the case of index funds i.e. passively-managed funds that attempt to mirror the performance of a chosen index. In all other cases, i.e. in actively managed funds, the fund manager is free to invest in stocks from within or outside the benchmark index.)
2. Mutual Funds Invest up to 35% in Debt
   Myth Clarified: While such an allocation may form a part of the investment mandate of equity mutual funds, they may not use the mandate in a stricter sense to invest in debt
   (...In other words, the intention is to be a 'true blue' equity fund that is almost entirely invested in equity instruments at all times. They usually invest a diminutive portion in debt and / or hold cash; but not always to the tune of 35%, with the intention of curbing losses in a falling equity market. So clearly, benefiting from investment opportunities in the debt markets by being invested therein at all times, is not the intent.)
3. Funds with more Stars/Higher Rankings Provided by Independent Third Party Agencies make better Buys 
   Myth Clarified: At best, rankings and ratings can serve as starting points for identifying a broader set of "investment-worthy" funds; but they are not the end to picking winning mutual funds.
   
   (...Fund rankings and ratings have gained popularity over the years. A higher ranking/rating is construed as a sign of the fund being a good investment avenue. Often many investors pick mutual fund schemes for their portfolio based on rankings and ratings assigned to them.
   
   But sadly, what investors fail to realise is that often rankings/ratings are based on the past performance of the funds. Most ratings do not provide adequate weightage to the qualitative aspects of analysing mutual funds such as portfolio characteristics, fund expenses, proportion of AUM actually performing, fund manager's experience and number of schemes managed by them, investment processes & systems, amongst others.
   
   Secondly, rankings/ratings are known to change over a period of time, in line with a change in the fund's performance. You see, fund rankings/ratings operate on the rationale that one-size-fits-all. They fail to reveal who should invest in the fund, based on risk appetite and risk tolerance.)
4. Once the Fund House Makes the Grade, so do all its Funds 
   Myth Clarified: Just because a fund house makes the grade, it doesn't necessarily mean that all its funds are worth investing in.
   
   (...Here the proverb, "One swallow does not make a summer" is appropriate.
   
   Investors often make the mistake of confusing the fund for its fund house i.e. they assume that simply because a mutual fund scheme belongs to a renowned fund house, it's worth investing in. Such an investment approach is far from correct. It is not uncommon to find mutual fund schemes that have either lost focus on account of persistent change in positioning or have fallen out of favour within the fund house itself, on account of their lacklustre investment themes. So, you as an investor should not be under this notion while investing in a mutual fund schemes.)

In addition to the myths we just spoke about, we will now tell you about some common myths that investors have about SIP investing. 


Some Common Myths about SIP
As you may know, apart from investing in a lump sum manner, mutual funds also offer a facility to invest systematically by enrolling for a Systematic Investment Plan. There are investors, who see to have some misconceptions about investing in mutual funds via the SIP mode. For example: 

1. Only Small Investors go in for SIPs
   Myth Clarified: Please note that SIP stands for Systematic Investment Plan (SIP) and not Small Investors Plan. They infuse a disciplined investment habit of investing regularly and provide you the benefit of compounding along with rupee-cost averaging.
   
   (... The fact is, they infuse a regular saving habit that most of us may have followed while we maintained a piggy bank; where we all saved some money every day or week or month to build a corpus at the end of a particular period, but with a market-linked rate of return earned over it, it may help you achieve your financial goals. Moreover, they provide the benefit of compounding along with rupee-cost averaging.)
2. Rupee Cost Averaging can be done in a Stock itself - then Why SIP? 
   Myth Clarified: SIP experimented on single scrip, can expose you to more volatility unlike SIP in a mutual fund scheme which reduces the risk, due to diversification provided by mutual funds.
   
   (...As per the market capitalisation bias followed by a mutual fund scheme, you can also strategically structure your portfolio depending upon your risk appetite. Similarly, you can structure your portfolio on the basis of the market caps (viz. large cap, mid cap, multi-cap, flexi-cap etc.) or style of investing (viz. value, growth or blend style) followed by the mutual fund scheme. Thus SIP mode of investing in mutual fund schemes can provide you with diversification across style and market caps, and thus offers better rupee-cost averaging. . But it should be noted that rupee-cost averaging neither ensures you profits nor protects you from making a loss in declining markets.)
3. SIP Mutual Fund Schemes are different from Lump sum Mutual Fund Schemes 
   Myth Clarified: The fact is SIP is just the mode of investing. There are no special mutual fund schemes for SIP investments.
   
   (...All you need to do is select mutual fund schemes prudently for your portfolio, which may help you with better returns in the long run.)
4. Lump sum Investments cannot be done in a Mutual Fund Scheme, where a SIP account exists 
   Myth Clarified: (...As mentioned earlier) SIP is just the mode of investing. Hence investing a lump sum amount to a mutual fund scheme where your SIP exists is possible.
   
   (...So say, you have an SIP instalment of Rs 1,000 per month going on in a mutual fund scheme and suddenly if you have a surplus of say Rs 50,000; then you can invest this lump sum amount to your on-going SIP account.)
5. I'll be Penalised if I Miss one or two SIP dates
   Myth Clarified: Since an ECS mandate is usually signed, the question of missing SIP dates doesn't arise. Also on the SIP date if you do not have sufficient funds in your bank account, you aren't penalised by the AMC; you will simply miss that SIP instalment, but your account will remain active.
   
   (...So it's not like the EMI on your loan, where you miss an instalment, and you are penalised.)
6. Markets are at a Low to Start a SIP
   Myth Clarified: Lower level markets can in fact be the right time to start an SIP and gain from future upside. Buying "low" is better than buying "high".
   
   (...You see, when the markets start correcting you would be accumulating more number of units, with every fall in the NAV, thus enabling you to lower your average purchase cost. And, when the markets surge once again (post the correction), you would gain, as the yield may work to be higher than the lump sum money invested at higher level. Remember, SIPs help you to manage the swings of the markets better. Therefore, don't unnecessarily try to time the markets, as it is not always possible.)
7. In case of SIP in Tax Saving Mutual Fund Schemes, Entire Money can be Withdrawn after 3 Years
   Myth Clarified: The fact is, your every instalment of SIP should have completed the lock-in tenure of 3 years for you to be in a position to withdraw.
   
   (...Very often, investors have this myth while they invest in tax saving mutual fund schemes. But as said, your every instalment of SIP should have completed the lock-in tenure. So say if you put in Rs 5,000 through SIP in the month of November 2013, the lock-in period for only 1 instalment (i.e. of November 2013) will get over or free in November 2016.)

Now that we have seen various myths about investing in mutual funds, here are some points to remember before we end our today's learning session today. 


Points to Remember

• Excitement is not good for one's investment portfolio in the long run (...Yes, mutual funds do lack the excitement of investing in stocks, but it's the kind of excitement that you as investors can do without for your long-term wealth and health.)
• Diversification benefit offered by mutual fund investing helps you reduce risk 
• Actively managed mutual fund schemes do not necessarily invest in the same stocks as its benchmark index (...The benchmark index only serves the stated purpose i.e. benchmarking in case of actively managed mutual funds. It offers investors the opportunity to evaluate the fund's performance.)
• Never invest in mutual fund schemes solely on the basis of star rating / ranking(...Star ratings / rankings can serve as a starting point, but they aren't the end to picking winning mutual fund schemes. You see, fund rankings/ratings fail to reveal who should invest in the mutual fund scheme, based on risk appetite and risk tolerance.)
• Never invest only on the basis of fund house (...Investors often make the mistake of confusing the mutual fund scheme for the fund house i.e. they assume that simply because a mutual fund scheme belongs to a renowned fund house, it's worth investing in. But this isn't the prudent approach to select winning mutual fund schemes.)
• SIPs infuse regular investing habit
• SIPs offer the benefit of rupee-cost averaging and compounding (...which helps you manage market volatility better as compared to stocks)
• Mutual fund schemes for SIP investment are the same as those for lump sum investments (...There aren't any separate mutual fund schemes for SIP investing)
• There is no penalty for missing an SIP instalment
• SIP in a tax saving mutual fund scheme has a lock-in tenure for each instalment.

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