Best Mutual Funds for Children – Features, Benefits, Risks, Tax, And More

Last Updated on Jan 23, 2024 by Anjali Chourasiya

Every parent wants to secure their child’s future. And with the increasing cost of education and living in India, it is wise to start the investing journey when the child is young. One of the best ways to secure your child’s future is through children’s mutual funds. Mutual fund schemes for children, commonly known as Children Gift Funds, provide returns that can offer financial benefits to your children in meeting expenses such as future education and marriage needs. In this article, let’s explore mutual funds for children in detail, along with their advantages and limitations, a list of the best mutual fund plans for children, and more.

What are children’s funds?

A children’s fund is an open-ended mutual fund aimed at child-specific goals, like meeting educational expenses and healthcare. The fund usually has a mandatory lock-in period of 5 yr. It can be extended until the child becomes a major.

Children’s funds can be considered a good solution-oriented plan to tackle the rising cost of education and other expenses. Moreover, investors cannot prematurely withdraw the money invested in the fund, making it an idle long-term investment.


Features of children’s funds

  1. Lock-in Period: Investors in Children’s 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 financial goals associated with a child’s future needs.
  2. Systematic Investment Plans (SIPs): Child-oriented mutual funds often facilitate investment through SIPs, allowing parents or guardians to make regular, smaller contributions over time. This promotes disciplined and systematic investing.
  3. 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 mix of debt instruments to provide stability and mitigate risk. Hence, analysing your risk profile and whether it matches the fund can be worthwhile.
  4. Objective of the Fund: The primary objective of Children’s Funds is to provide a stable investment avenue geared towards long-term capital gains. Investors can choose between debt-focused and equity-linked 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, promise significant returns over an extended period.
  5. 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.
  6. Education Benefits: Some mutual funds for children may come with added benefits like insurance cover or waivers of future premiums in case of an unfortunate event, ensuring the continuity of the investment plan.
  7. Diversification: To manage risk effectively, these funds typically diversify their investments across various asset classes, such as equities, bonds, and money market instruments.
  8. 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.
  9. 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 invested amount.
  10. Exit Load and Expense Ratio: Children’s Funds come with an annual expense ratio, representing the cost associated with managing the fund. Additionally, investors may incur an exit load when redeeming the fund, which should be considered as part of the overall cost structure associated with investing in Children’s Funds.

Before investing in any mutual fund for children, it’s essential for parents or guardians to thoroughly understand the fund’s features, risk factors, and investment strategy. Consulting with a financial advisor can help make informed decisions based on individual financial goals and risk tolerance.

Best mutual funds for children (2024)

Note: The data is from 23rd January 2024 and sorted using Tickertape Mutual Fund Screener using the below-mentioned parameters:

  • Category > Others > Solution Oriented – Children’s Fund
  • Plan: Growth (default)
  • CAGR 5-yr (Sort from high to low)

Why should you consider investing in mutual funds to secure your child’s future?

Bank Fixed Deposits, Unit Linked Insurance Plans (ULIPs), endowment plans and other traditional saving instruments offer a low-interest rate. Plus, the interest received on bank deposits is taxable according to the investor’s income tax bucket, and post-tax and inflation-adjusted returns are essentially non-existent. 

Considering all these in mind, investing in mutual funds seems to be a great way to start saving for your child’s future. These funds help you build a diversified portfolio, allowing you to generate long-term returns. 

Additionally, in today’s rising inflation and economic uncertainty, investing in avenues such as mutual funds that have the potential to beat inflation is increasingly important.


Advantages of investing in children’s funds

Goal-based asset allocation: Children’s plan allows parents to allot different funds based on goals like schooling, higher education, healthcare needs, marriage, etc. This makes the investment portfolio well-segregated. Additionally, these funds allow parents to choose a suitable asset allocation based on their risk appetite and budget.

Tax benefits: Under Section 80C of the Income Tax Act, 1961, investments made in children’s plans up to Rs. 1,50,000 per year are eligible for tax exemption. Additionally, Section 10 (32) of the Income Tax Act 1961 allows for an annual exemption of Rs. 1,500 per child if the interest income exceeds Rs. 6,500 annually. Parents of children with disabilities can also qualify for extra tax benefits if they apply for children’s funds. Finally, the indexation benefit can result in lower taxes payable during redemption.

Lock-in period: Most mutual funds for children have a lock-in period of 5-yrs with a possibility of increasing it till the child attains maturity, i.e. 18 yrs. A long-term lock-in period allows funds to accumulate and helps in meeting the goal.

Professional management of the fund: Professional fund managers are responsible for managing children’s mutual funds, which means that investors with limited market knowledge can still invest in the top children’s mutual funds. As a result, investors can expect better returns. 

Limitations of Investing in Children’s Funds

Though the advantages of investing in children’s funds seem promising, there are a few limitations associated with them as well. Let’s have a quick look at them.

  1. Exit load: Mutual funds for children have a minimum lock-in period of 5 yrs. However, premature withdrawals are allowed as well, which comes with a high penalty. It is the exit load which can go up to 4%. Therefore, it is always wise to check the exit load details of the fund you are interested in.
  2. Volatility: Mutual funds are considered one of the highly volatile options. Well, it also depends on the asset allocation. For instance, equity mutual funds are more volatile than debt mutual funds. Hence, considering the volatility factor of the fund before investing in it sounds like a wise choice. 

Taxability of children’s funds

Mutual funds for kids come with tax benefits for the investor. When you invest in a children’s mutual fund, it qualifies for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. However, the maturity gains are taxable as per the law. For equity funds, the gains above Rs. 1 lakh in a financial year are taxed at 10%. While for the debt funds, the long-term capital gains are taxable up to 20% with indexation.

Who should Invest in Children’s Funds?

  • Investors who want to secure their child’s future or save up for their education, healthcare, and other essential needs
  • Parents looking to save tax
  • Investors who want to invest in the long-term
  • Investors looking for the flexibility of a lock-in period 

Are children mutual funds balanced funds or hybrid funds?

Children’s gift funds or mutual funds invest in both equity and debts. Hence, they can be classified as balanced funds or hybrid funds.

For hybrid funds, there are two classifications: hybrid equity-oriented mutual funds, which invest 60% or more in equity, and hybrid debt-oriented mutual funds, which invest 60% or more in debt products. 

Children’s mutual funds Vs Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is one of the popular government schemes for a girl child. Let’s explore the differences and similarities between children’s mutual funds and Sukanya Samriddhi Yojana.

Parameter Children mutual funds Sukanya Samriddhi Yojana
Eligibility The account can be for a girl or boy child The account must only be in the name of a girl child
Age limit No minimum age requirement. However, the maximum age limit is 18 yrs. The minimum age requirement is three months. The maximum age limit is 10 yrs.
Number of accounts No restriction on the number of accounts that can be opened. A maximum of two accounts can be opened for a family with two or more daughters.
Who manages the account Parents or legal guardians Parents or legal guardians till the girl child turns 18 yrs old. Post that, she can take control of the account.
Returns No fixed interest rate as it depends on market fluctuations. Fixed – currently, it is 7.6% per annum.
Investment limit No limit Rs. 1.5 lakh per year
Risk Its dependency on market fluctuations makes it riskier than Sukanya Samriddhi Yojana. Risk-free as sovereign guarantees back the scheme
Lock-in period Usually, it is a minimum of 5 yrs or until the child turns 18 yrs, whichever is earlier. 21 yrs from the date of opening the account
Premature withdrawal Allowed, but exit load can increase up to 4%. Allowed in case the child dies, is no longer a citizen of India, or is facing difficulties for survival like in the case of a parent or guardian.
Maintenance cost The AMC charges a fee called expense ratio every year. No maintenance cost.

Conclusion

Children’s mutual funds are one of the best investment avenues when it comes to future security and tax savings. Tickertape Mutual Fund Screener helps you in deciding the best mutual fund for your portfolio. Additionally, with our new Mutual Fund Portfolio feature, you can fetch all your mutual funds holdings in one place, get their detailed overview, analyse your top gainers and losers, and download your data for more analysis. Read more about it here and explore the Portfolio now! Happy Investing!

FAQs about mutual funds for children

  1. What are the risks involved in children’s funds?

While children’s funds are aimed at long-term investment, they don’t guarantee returns and are susceptible to market conditions. The fluctuations and exposure in equity-linked funds make it a moderate to high risk. Hence, before investing, it is worthwhile to consider talking to an expert.

  1. Can I gift a mutual fund to my child?

Yes, there are many mutual fund houses that offer children mutual funds, which you can gift to your children. They are also related to other requirements, such as schooling, higher education, marriage, healthcare, etc. The parents or guardians can invest in the mutual funds on behalf of their children and gift it to their children.

  1. Is there any requirement for investing in children’s funds?

There are certain requirements for investing in children’s funds. The parents or guardians must provide the children’s proof of age, such as a Passport, Aadhar Card, Birth Certificate, etc., to invest in the mutual funds for kids. Proof of relationship with the child is also required. It can include a Passport or Birth Certificate with a mention of the parent’s/guardian’s name. 

  1. What is the lock-in period for children’s funds?

Mutual funds for children come with a mandatory lock-in period of 5 yrs or until the child becomes an adult. As a parent or guardian, you can invest in it for different purposes like marriage or child education.

  1. What are the SBI child plans for 5 yrs?

SBI Life Insurance offers two types of child insurance plans: the Smart Scholar Plan and the Smart Champ Insurance Plan. The Smart Scholar Plan has an entry age for children from 0 to 17 years and for parents from 18 to 57 years (as the life assured). The policy term ranges from 8 to 25 years, with premium payment options including single premium and limited premium up to the policy period. 

The Smart Champ Insurance Plan has an entry age for children from 0 to 13 years and for parents from 21 to 50 years (as the life assured). The policy term varies from 5 to 18 years, with premium payment options including a single premium and various periodicities such as monthly, quarterly, half-yearly, and yearly. The sum assured for both plans depends on the policy and premium payment terms, offering flexibility to suit individual preferences and needs.

Anjali Chourasiya
Latest posts by Anjali Chourasiya (see all)

Leave a Comment

Sign Up to Our Newsletter

Be the first to know the latest updates

Whoops, you're not connected to Mailchimp. You need to enter a valid Mailchimp API key.