Make bequests a long term goal in retirement:

An important starting point for impactful bequests to grandchildren is having them as a long term financial goal for retired life. This helps organise retirement finances accordingly.

Broadly, you can earmark certain existing investments for bequests. Here, long term growth investments like hybrid mutual funds such as multi asset funds and balanced advantage funds that invest in a mix of equity, debt and other assets may be considered ideal. When investors stay invested in such investments for long periods like say 5-8 years, they may tap into the long-term high growth potential of equity investments with debt investments helping contain volatility. You can also make fresh regular and lump sum contributions in such growth investments during retirement.

Before dwelling further on the broad steps required, it is worth mentioning why mutual funds are one of the ideal avenues in meeting this important financial goal.

How Mutual Funds Help Build Legacy For Grandchildren

Provide flexibility:

You can earmark existing mutual fund investments like those in hybrid mutual funds such as multi asset funds and balanced advantage funds which benefit from flexibility in investments in different asset classes. During long retired lives, one can rejig investments if the need be, without significant costs and tax impact.

Deliver convenience:

During the course of long retired life, you have the freedom to make fresh regular investments with Systematic Investment Plans (SIP) for amounts as small as Rs 500 as per the Scheme Information Document. Similarly, lump sums can also be invested with the help of Systematic Transfer Plans (STP).

Enable easy access:

During emergencies in retirement, mutual funds enable easy access to money compared to many alternatives that have lock-in periods and penal provisions for premature exits.

Your Bequest Action Plan

Determine the needs:

As with every financial need, determine the specific needs of grandchildren that your bequest will help meet. This might be needs like higher or continuing education programmes. Estimate how much will be required and when. This will help you choose the appropriate investments, make an investment plan, and incorporate it in the overall financial planning.

Earmark portion of investments:

Hybrid funds like multi asset funds and balanced advantage funds with potential to deliver long term growth, can be part of the investment portfolio for bequests along with other investments like those in debt mutual funds to create a portfolio for each grandchild.

Reinvest excess regular income:

Regular income over and above required to meet current and imminent expenses may be reinvested in growth investments. This is especially so in early retirement when one tends to have excess regular income due to receipt of multiple retirement benefits like provident fund and gratuity. Reinvestments may include excess regular income from sources and investments like pensions, life insurance annuities, interest from fixed deposits (FDs) and post office Monthly Income Scheme (MIS).

Use SIPs for regular growth investments:

As in the past, regular investments can be made with Systematic Investment Plan (SIP) in hybrid funds like multi asset funds and balanced advantage funds. Let us take the hypothetical example of Sudha who retired on December 31, 2014, and right away started investing Rs 5,000 every month in a balanced advantage fund and earmarked it for her granddaughter’s higher education. By end of 2024, she would have saved Rs 11.08lakh*

Of course, grandparents may also consider solution oriented plans like Children’s Plans which invest in a mix of equity and debt and typically have lock-in periods for investments.

Get STPs for re-investing lump sums:

Maturing investments like National Savings Certificates (NSC), mutual fund Fixed Maturity Plans (FMP) and Target Maturity Funds can also be invested in the growth investments. This can be done with the help of Systematic Transfer Plan (STP) with the lump sum being initially parked in liquid funds or short term debt mutual funds. Thereafter, the money is regularly invested in designated hybrid mutual funds. This effort can be further supplemented by investing inflows like dividends and tax refunds.

Decide on ownership:

For existing investments earmarked to a grandchild, nomination details need to be updated. For fresh investments, one needs to decide on the ownership of the investments. They can be made in the name of minor grandchildren with the grandparent signing a third-party declaration along with the parent or legal guardian.

On investing in the name of a minor grandchild, the grandparent loses ownership over the investment and the grandchild becomes the owner on attaining majority at age 18. At that point, all formalities like KYC will need to be undertaken afresh. Till the child attains majority, income from such investments gets clubbed with that of the parent with higher of the two incomes, under Section 64(1A).

The other option often recommended by many experts is to have the minor grandchild as the nominee. Here, grandparents can retain ownership and manage the investments over time ie till he attains the age of 18 years. For major grandchildren, grandparents may also consider joint holding for fresh investments.

Review portfolio performance:

The progress of the portfolios for grandchildren need to be reviewed annually during retired life by comparing them with scheme benchmarks and peers. Rejigging investments is required in case of persistent underperformance or significant periods of sharp run ups.

Incorporate in a Will:

Investments earmarked for grandchildren need to be appropriately detailed and elaborated in a Will. This is an absolute must even if all mutual fund investments have updated nominees. Remember that the nominees collect the money on behalf of the heirs. It is only with a Will that delineates ownership of investments that the ownership can get transferred to rightful heirs after which they can enjoy their benefits.

To sum up, with appropriate planning and using the smart features of mutual funds, in retirement, grandparents can ensure an enduring impact on the lives of grandchildren and provide wings to their dreams.

Source Reference

*amfiindia.com/research-information/other-data/mf-scheme-performance-details; Assuming 10 year annual return of 11.21% return based on Crisil 50 +50 Moderate Index , as on January 7, 2025.