Investing in your child’s future is one of the most important financial goals for any parent. At present, the cost of education in India is steadily increasing, making it essential to plan and build a strong financial foundation early on. Children’s mutual funds are designed specifically to help parents and guardians accumulate wealth over time for their child’s future needs, offering a structured way to save and invest.
In this comprehensive blog, we will explore what children’s mutual funds are, how they work, their benefits, and the best funds available to secure your child’s future financially.
What Are Children’s Mutual Funds?
Children’s mutual funds are open-ended mutual fund schemes specially designed to help parents save for their child’s future financial needs, typically focusing on long-term goals like education, marriage, or other life events. These funds often have a lock-in period and tend to focus on long-term wealth creation through systematic investments, allowing the investment to grow over time through the power of compounding.
Why Do You Need To Invest In Children’s Mutual Funds?
There are several reasons why you should start investing in children’s mutual funds.
Rising Education Costs
Education, especially higher education, is becoming more expensive with time. Whether it’s pursuing a professional degree in India or studying abroad, the cost of tuition, accommodation, and other related expenses are significant. Investing in children’s mutual funds early on allows parents to build a corpus that grows over time, which helps them handle these expenses without burdening their finances at once.
Also Read: Different Types Of Mutual Fund Schemes
Long-Term Wealth Accumulation
Children’s mutual funds are designed to help parents build long-term wealth through systematic investments. With the power of compounding, even small contributions made consistently can grow significantly over time. This allows parents to accumulate a considerable amount of money for their child’s future.
Inflation Protection
Inflation can erode the value of money over time, especially when it comes to long-term goals like education. Children’s mutual funds, particularly equity-based ones, have the potential to generate inflation-beating returns. This helps parents accumulate a corpus that retains its purchasing power in the future.
Financial Independence For Children
Investing in children’s mutual funds ensures that the child has financial independence when they grow up. Whether it’s funding higher education or pursuing their dreams, having a dedicated financial corpus gives the child a head start in life without relying entirely on their parents.
What Are The Children’s Mutual Funds?
Here is a list of children’s mutual funds, ranging from the highest to the lowest Assets Under Management (AUM).
| Scheme Name | AUM (cr) | 3-yr return | 5-yr return |
| HDFC Childrens Gift Fund | 5,609.09 | 16.21% | 19.46% |
| UTI CCF- Savings Plan | 4,721.48 | 9.36% | 11.71% |
| SBI Magnum Childrens Benefit Fund – Investment Plan | 2,855.58 | 23.27% | Not Applicable |
| ICICI Prudential Child Care Fund – Gift Plan | 1,393.77 | 17.98% | 18.45% |
| Aditya Birla Sun Life Bal Bhavishya Yojana | 1,151.68 | 12.63% | 14.21% |
| Axis Childrens Fund – Compulsory Lock-in | 934.89 | 7.54% | 13.02% |
| Axis Childrens Fund – No Lock-in | 934.89 | 7.54% | 13.02% |
| UTI CCF- Investment Plan | 644.40 | 12.24% | 19.16% |
| LIC MF Childrens Fund | 17.38 | 11.99% | 13.82% |
| SBI Magnum Childrens Benefit Fund – Savings Plan | 121.21 | Not Applicable | Not Applicable |
| Scheme Name | AUM (cr) | 6 months return | Year To Date |
| Union Childrens Fund | 60.18 | 17.03% | 22.60% |
Source: Moneycontrol, NAV & Returns data as of 23 October 2024.
What Are The Features Of Children’s Mutual Funds?
Below are the features of children’s mutual funds.
Lock-In Period – Investors in children’s mutual funds commit to a lock-in period of a minimum of 5 years or until the child reaches 18 years of age, whichever comes first. This lock-in period ensures a disciplined, long-term investment approach, aligning with the specific goals associated with a child’s future needs.
Systematic investment Plans (SIPs) – Child-oriented mutual funds often facilitate investment through SIPs. This allows parents or guardians to make regular, smaller contributions over time.
Risk Profile – These funds are typically considered to have a moderate risk profile. While they may have exposure to equities for potential growth, they often include a combination of debt instruments to offer stability and reduce risk. Hence, analysing your risk profile and whether it matches the fund can be worthwhile.
Also Read: Top Strategies To Reduce Mutual Fund Risk
Objective Of The Fund – The primary objective of children’s mutual funds is to offer a stable investment avenue geared towards long-term capital gains. Investors can choose between equity-linked and debt-focused funds based on their risk and return preferences. Debt-focused funds offer stable returns with minimal risk, whereas equity-linked funds, while subject to higher short-term fluctuations, offer significant returns over an extended period.
Flexibility – Child-centric mutual funds often offer flexibility in terms of withdrawal options. This may include partial withdrawals or systematic withdrawal plans to meet specific financial needs as they arise.
Professional Fund Management – Child-oriented mutual funds are managed by experienced fund managers who make investment decisions based on market conditions and the fund’s objectives.
Tax Benefits – Certain mutual funds for children may offer tax benefits under Section 80C of the Income Tax Act, allowing investors to avail deductions on the investment amount.
Also Read: ELSS Mutual Funds
What Are The Advantages Of Investing In Children’s Mutual Funds?
There are several benefits to investing in children’s mutual funds.
Goal-Based Asset Allocation
Children’s plans allow parents to allow different funds based on goals like schooling, higher education, healthcare needs, marriage, etc. This makes the investment portfolio well-segregated. On top of this, these funds allow parents to choose a suitable asset allocation based on their risk appetite and budget.
Disciplined Saving & Habit Building
Investing a fixed amount regularly instils financial discipline in parents and teaches children the value of long-term saving. This habit can benefit them throughout their lives.
Tax Benefits
Investments made in children’s plans up to ₹1.5 lakhs per year are eligible for tax exemption under Section 80C of the Income Tax, 1961. On top of that, Section 10(32) of the Income Tax 1961 allows for an annual exemption of ₹1,500 per child if the interest income exceeds ₹6,500 annually.
Parents of children suffering from specified disabilities can benefit from additional tax exemptions if they apply for children’s funds. Mutual funds for children, which are marketed as a gift, are tax exempted. Tax is levied only when the funds mature, and the amount is disbursed.
Professional Management & Diversification
Experienced fund managers handle the investment decisions, ensuring diversification across different asset classes. This helps reduce risk and maximise potential returns compared to investing directly in stocks.
What Are The Factors To Consider Before Investing In Children’s Mutual Funds?
Here are some of the factors you should consider before investing in children’s mutual funds.
Financial Goals & Investment Horizon
When investing in children’s mutual funds, it is important to align the investment with your financial goals and the timeline for achieving them. For example, if the primary goal is funding higher education, you should consider the years left until your child will need the funds. Equity-oriented funds may be more suitable for long-term goals because of their potential for higher returns, while debt-oriented funds might be preferred for shorter-term goals due to their stability.
Historical Performance & Consistency Of Returns
Analysing the historical performance of a mutual fund can offer insights into its potential future returns. Look for funds that have shown consistent performance over multiple market cycles. This can indicate the fund’s ability to manage market volatility and deliver steady returns. On the other hand, it is important to know that past performance is not a guarantee of future results.
Expense Ratio & Exit Load
The expense ratio represents the annual fee charged by the fund for managing your investments. Lower expense ratios can boost your net returns over time. On top of that, be aware of the exit load, which is a fee charged for redeeming the fund before a specified period. Understanding these costs is crucial as they can significantly affect your overall returns.
Asset Allocation
Children’s mutual funds can be equity-oriented, debt-oriented, or a balanced mix of both. Equity funds have the potential for higher returns but come with higher volatility. On the other hand, debt funds provide more stability with lower returns. Your choice should depend on your risk tolerance and investment horizon. A balanced approach may offer a good compromise between growth and stability.
Fund Management & Reputation
The expertise and track record of the fund manager play an important role in the performance of a mutual fund. Research the background of the fund management team and the reputation of the asset management company. Funds managed by experienced and reputable managers may be better positioned to navigate market challenges and capitalise on opportunities.
How Do Children’s Mutual Funds Compare With Traditional Savings Schemes?
Let’s take a look at children’s mutual funds in comparison to popular saving schemes like Fixed Deposits (FDs). Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), etc.
| Parameters | Children’s Mutual Funds | FD | PPF | SSY |
| Return Rate | 10% to 12% | 6% to 8% | 7.1% | 8.2% |
| Risk | Moderate to High | Little to no risk | Virtually risk-free | Virtually risk-free |
| Lock-In Period | Until the child turns 18 or 5 years | Flexible tenures; may incur a penalty for early withdrawals | 15 years | Until the child turns 18 |
| Inflation Protection | Equity-based funds have the potential to beat inflation | Lower returns than inflation | Lower returns than inflation | Lower returns than inflation |
How Are Children’s Mutual Funds Taxed?
Short-Term Capital Gains (STCG) Tax – If you hold equity mutual funds for less than a year, the gains from these investments are taxed at a rate of 20%.
Long-Term Capital Gains (LTCG) Tax – The gains up to ₹1.25 lakh in a financial year remain tax-free. However, any gains above ₹1.25 lakh are taxed at a flat rate of 12.5%.
Best Mutual Funds To Fund Your Child’s Education – The Conclusion
The key to funding your child’s education through mutual funds is to start as early as possible and stay consistent with your investments. Consider starting your journey with equity-oriented funds if you have a long investment horizon and shift towards safer instruments like debt funds as your goal approaches.
By choosing the right mix of funds based on your risk tolerance, time horizon, and financial goals, you can build a substantial education fund that ensures your child’s future is well-secured without putting undue financial stress on your family.
We hope you were able to understand what children’s mutual funds are, their features, advantages, and the list of children’s funds. If you wish to start investing in the top mutual funds, create a free account with Koshex and start investing today!
Frequently Asked Questions (FAQs)
How do children’s funds offer inflation protection?
Equity-oriented children’s mutual funds have the potential to offer inflation-beating returns, which means that they grow at a rate higher than inflation over time. This ensures that your investment maintains or increases its purchasing power, making it a good choice for long-term goals like higher education, marriage, etc.
Is there a minimum investment period for children’s mutual funds?
While there is no strict minimum period for investing in children’s mutual funds, they are ideally suited for long-term goals (10 to 15 years or more). The longer the investment horizon, the more time you give the investment to grow and benefit from the power of compounding.
What happens to the investment if the parent passes away?
Most children’s mutual funds allow the nomination of a legal guardian or another family member in case of the parent’s demise. The investment will then be transferred to the nominee, ensuring that the child’s financial goals are still met.
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