Last week, we presented Rohit’s dilemma in investing for his newborn child. We had discussed child plans, and this week, we are decoding children funds offered by mutual funds.
Let’s answer some common queries on Children Funds offered by Mutual Fund Houses.
What is a children fund offered by mutual funds?
Children’s mutual funds are investment vehicles designed to help individuals save and grow funds for their children’s future financial needs, such as education, marriage, or other significant life events.
These funds are typically structured to provide long-term capital appreciation.
Here are some key points on child mutual funds:
Lock-in Period: A children’s mutual fund will have a lock-in period of five years. If the child becomes a major (whichever happens first), the invested amount cannot be withdrawn for the specified number of years. This feature is often included to ensure that the investment stays intact for the child’s future needs.
Flexibility: Among the 10 AMCs which are offering children’s plans, two (SBI & UTI) also give the investors options to choose from equity-oriented or debt-oriented child mutual funds (This is based on their risk tolerance and investment goals-do contact a financial planner). Equity funds have the potential for higher returns but also come with higher volatility, whilst in debt funds the returns are lesser but less risky than equity schemes.
Systematic Investment Plan (SIP): Many investors choose to invest in child mutual funds through SIPs, which allow them to invest a fixed amount regularly (monthly or quarterly). SIPs are a disciplined way to invest and can help in rupee cost averaging.
Nomination: Investors can typically nominate their child as the beneficiary, ensuring that the funds are transferred to the child in case of the investor’s unfortunate demise. Recent regulation by SEBI clearly states that the fund can only be withdrawn from the bank account that is in the name of the child. So, while investments can be made from any account, the redemption has to be from the child’s account.
Tax Implications: Mutual funds themselves do not offer specific tax benefits for children. Investors under the old tax regime can choose to invest in funds that qualify for exemption under Section 80C of the Income Tax Act, such as equity-linked saving schemes (ELSS). Parents can also choose to invest in the ELSS category and use the corpus for the child’s benefit, thereby achieving twin benefits with one investment corpus for the child and tax savings. They can claim up to Rs. 1.5 Lakh deduction in this scenario. They can also claim an annual exemption of Rs. 1,500 per child under Section 10 (32) of the Income Tax Act, 1961 if the interest income exceeds Rs. 6,500 annually.
What are the various types of children’s plans that are available in the market?
We take into consideration some funds that have been available in the market for more than a decade and compare it with common instruments like Post Office Savings, Fixed Deposits, and Sukanya Samridhi.
|
Investment Articles |
Fixed Deposits |
Sukanya Samridhi |
Children Mutual Funds * |
|
ROI |
7.00- 8.00 % |
8.5 % |
9- 10 %(lowest) |
|
Maturity |
6 months – 120 months |
18 years |
18 years |
HDFC Children’s Gift Fund has provided a return of 20.92% for a 3-year time period- whilst Tata Young Citizens Fund – Direct Plan – Growth – has provided a return of 20.59 % over 3 yrs. The highest return has been clocked by SBI Magnum Children’s Benefit Fund – Investment Plan – Direct Plan-Growth – 37.03 % in a 3-year frame.*
Keep in mind the returns could differ due to market conditions. In the last few years, there has been a run in the equity markets and hence the returns could differ as per market conditions.
Chintan Haria, Principal Investment Strategist, ICICI Prudential AMC, says, “Investing in children’s funds proves to be a savvy choice for parents aiming to secure their children’s financial future. The lock-in ensures that the funds do not get used during exigencies, and the facility of SIP allows for the building of habit to achieve the goals of parent. Meanwhile, SEBI’s regulation on redemption of funds to the child’s account only ensures that the money is rightfully moved to the child’s account only and parents do not lose focus of the purpose of the investment.”
Disclaimer:
Do note that these returns have been picked up from the mutual fund tracker from the Economic Times website.
This is general information and not suggestions for any scheme. Before making any decision, it’s advisable to consult with a financial advisor who can provide personalized advice based on your financial goals, risk tolerance, and the specific needs of your child. Additionally, review and compare multiple plans to find the one that aligns best with your financial objectives. We are not recommending any schemes.
