Home / Money / Personal Finance /  The ABC of introducing children to finance & investment

Recently, a news report said that a Mumbai teen had spent 10 lakh on the online, multiplayer battle royale game PUBG from his mother’s bank account. Kids, especially in their early teens, when entrusted with money may blow it on something unnecessary.

It is, therefore, very important for parents to keep track of how their children spend money. While interfering in all your teen’s decisions is not recommended, it is important to keep tabs on their big expenditures and also to educate them about investing and not getting lured by get-rich-quick schemes or other such scams.

When it comes to teens and investing, one cannot help but highlight the fact that Warren Buffett bought his first stock in 1942, when he was 11.

So, technically, he was not even in his teens. Nowadays, kids are introduced to money much earlier. It is encouraged that one gets initiated into money concepts at an early age, because managing money is something that is not taught in school.

Parents have traditionally given kids pocket money. Kids have had piggy banks to give them the experience of saving money and seeing it grow.

Some parents also open bank accounts for their kids at an early age, so that they learn about savings and money concepts. “When parents are themselves taking care of budgeting, planning and investments, kids see them and start understanding money," says Hina Shah, CFP and financial coach, LUHEM.

The right time: There is no ideal age to introduce your teen to investing. “It would vary from person to person and depends on exposure and interest. If your child is asking questions and is trying to understand the world of investing, then it is probably the right time to introduce them to it as they would take an active interest in learning," says Mitul Mehta, co-founder, Streak, a digital bank for teenagers.

While the earlier the better, one would do well to introduce kids to investing no later than 18.

“Typically, during this time, a student is into his/her years of graduation or is pursuing postgraduate degrees. It’s better to get introduced to the world of investment at that age as it makes the child conscious of benefits of creating wealth," says Prakarsh Gagdani, chief executive officer, 5paisa.com.

Here, it is important to understand some legal aspects.

A demat account can be opened in the name of a minor, but this needs to operated by a parent or guardian until the minor attains the age of 18. As a minor, one is not allowed to enter into a contract with a stockbroker to sell or purchase any security. However, if the minor owns some securities by inheritance or receives them as a gift, a trading account can be opened in the name of the minor for the purpose of selling such securities by the parent or guardian .

On the other hand, a mutual fund account/portfolio can be created in the name of a minor by parents or a legal guardian. Standing instructions with respect to the minor’s SIP, STP and SWP may also be provided. On maturity, the status of the folio needs to be changed from minor to major.

Getting started: Introducing your kids to investing should not be something sudden. “Understanding the basics of banking products, discussing budgets and investments over dinner with the family, and actively letting them learn and ask questions would stimulate their interest in personal finance in general. Post this, more in-depth conversation on types of investments made and the reasoning behind them can happen," says Mehta.

According to Gagdani, the best way is to get them started is to do a course. “These days there are a lot of affordable courses which are available online that teach the basics," he adds.

Starting SIPs of mutual funds in small amounts is a good start. Mehta believes that learning should start by investing in stocks in small amounts when they turn 18. “This helps the child understand how the value of the stock fluctuates according to the company’s decisions and helps in capturing a gist of the fundamentals of share value," he says.

The learning path: Setting goals are a great way to push children to learn and improve further. “Setting goals, like buying a bicycle or a video game console, can teach a child that for smaller and more immediate temptations, they cannot let go their future goals which are more important for them," says Shah. However, Gagdani feels that teens may not be very clear about their goals in life. According to him, the ideal approach for this age group would be to start the investment with an aim to inculcate the habit of investing.

Taxation: U/s 64(1a) of Income Tax Act, income of minor child will be clubbed in the hands of parents, based on certain conditions. However, income on account of any activity involving application of skills, talent or specialized knowledge and experience of the child shall not be clubbed in the hands of either parent. “Nowadays many children do courses on stock market and investments and are capable of doing transactions themselves. Hence, in case the minor has such a specialized knowledge and experience of investments and then he/she makes an income from mutual funds or the sale of securities (investment) in his/her name, then the capital gains should be taxed in his or her individual income tax file," says Vivek Jalan of Tax Connect Advisory Services LLP, a consulting firm. However, even in case the income on sale of securities is clubbed with the parent’s, only the net taxable capital gain needs to be clubbed and not gross capital gain.

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