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Ever worry about the ever-rising cost of education or wonder how you'll afford your child's education, wedding and other life goals? Children's funds offer a smart solution. These specialised mutual funds invest for the long term, helping you grow a substantial nest egg for your child's future needs. Imagine your child graduating debt-free or walking down the aisle with confidence, thanks to your smart planning today. This article dives into the benefits of children's funds, helping you understand how they work and if they're the right fit for your family's financial goals.
Key Takeaways
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Children’s mutual funds are long-term investment plans designed to meet future goals like education or marriage.
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They invest in a mix of equity and debt instruments, offering a balance of risk and return.
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These funds include lock-in periods to encourage disciplined saving and long-term growth.
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Investors can enjoy tax benefits under Section 80C of the Income Tax Act.
What Are Children’s Mutual Funds In India?
Children's mutual funds are investment plans designed to help you save for your child's future. Unlike traditional savings accounts, they invest your money in a mix of stocks and bonds, aiming for long-term growth. This growth helps you stay ahead of rising costs like education or future weddings.
Most children's mutual funds in India invest in a combination of equity and debt instruments. This balanced approach allows investors to find a sweet spot between risk and potential returns. Depending on their risk tolerance and investment timeline (until the child reaches adulthood), parents can choose a fund with a higher debt allocation for stability or a higher equity allocation for potentially greater growth. Children's mutual funds typically come with a lock-in period of at least 5 years, which can extend until the child reaches maturity.
Also, check out Large Cap Mutual Funds
What Is the Purpose of Children's Funds?
The main purpose of a mutual fund for a child is to build a source of finances for major future expenditures like higher education, boarding, relocation, etc. Mutual funds for a child offer a diversified portfolio, aiming for attractive returns on the invested funds. Here are some more advantages of children’s mutual funds:
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Lock-in periods typically range from a minimum of 5 years but they can also extend until the child reaches adulthood (i.e. 18 years old). This allows parents to tailor the investment horizon to their specific financial goals and the child's anticipated needs. For instance, if a parent is saving for their child's college education 10 years down the line, they can choose a 10-year lock-in period. This flexibility ensures the investment matures when the funds are most needed.
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This enforced long-term perspective discourages impulsive withdrawals and encourages a disciplined savings habit for parents. Additionally, holding the investment throughout market fluctuations can lead to better returns compared to frequent selling during dips.
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These funds offer a decent balance of risk and return thanks to their hybrid portfolio. A combination of equity and debt instruments ensures attractive returns with diversification and consequent reduced risks.
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Furthermore, these funds benefit from professional management by experienced fund managers who handle investment decisions and ensure diversification across different asset classes. This diversification helps mitigate risk and maximise potential returns compared to individual stock picking.
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A high exit penalty in children's mutual funds in India reduces early redemption rates, allowing the funds to accumulate higher numbers of compounding over their tenure. Fund houses usually charge over 4% penalty if an investor decides to sell their children's fund before its minimum lock-in period of 5 years.
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Investing in children's mutual funds can offer tax advantages under Section 80C of India's Income Tax Act, potentially reducing your taxable income.
Also, read What is Lock-In Period in Mutual Funds here.
Taxability of a Children’s Fund
Interest earned on these investment options is tax-exempt. Mutual funds for children, which are marketed as gifts, are also exempted from taxes. Tax is levied only once the funds are matured and the amount has been disbursed. The charges are also minimised to avail the benefits of indexation.
Parents can also get an exemption from income tax under Section 80C if they invest in these funds. They may claim up to ₹1.5 Lakh deduction in this scenario.
They may also claim an annual exemption of ₹1,500 for every child under Section 10 (32) of the Income Tax Act, 1961, if the annual interest income exceeds ₹6,500.
Parents of children suffering from certain specified disabilities may benefit from additional tax exemptions if they apply for children's mutual funds.
Who Should Invest in a Children's Fund?
Children's mutual funds offer a compelling financial tool for parents to safeguard their child's future. Here's a closer look at the key benefits:
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Long-Term Growth Potential: These funds invest for the long term, aiming to accumulate a significant corpus for your child's future needs. This growth potential helps outpace inflation and rising costs associated with education or other milestones.
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Tax-Advantaged Savings: Investing in children's mutual funds can offer tax benefits under specific regulations (like Section 80C in India). This reduces your taxable income, allowing you to save more effectively towards your child's goals.
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Discouraging Early Withdrawals: Children's mutual funds often come with a lock-in period and may impose penalties for early redemption. This discourages impulsive withdrawals and encourages a disciplined savings habit, ensuring the funds remain invested and have time to grow.
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Flexibility for Different Needs: Many children's mutual funds provide a range of lock-in periods, typically from 5 years to the child reaching adulthood. This allows you to customise the investment horizon based on your specific goals and the child's anticipated needs.
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Transition of Ownership: Once the child reaches adulthood (often 18 years old), ownership of the investment can be transferred to them. This provides them with greater control over their finances, subject to completing any necessary Know Your Customer (KYC) requirements with the financial institution.
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Supporting Career Aspirations: By accumulating a substantial corpus, children's mutual funds can empower your child to pursue their career aspirations. Whether it's higher education, starting a business, or simply having a financial safety net, these funds can provide valuable support for their future endeavours.
Children's mutual funds cater specifically to parents who want to ensure their child's financial security and provide them with the resources to build a fulfilling life.
How Do Children's Mutual Fund Compare with Other Savings Schemes like FD, PPF, Sukanya Samriddhi?
Let us take a quick look at Children's Mutual Funds in comparison to other popular saving schemes such as Fixed Deposit, PPF, Sukanya Samriddhi, etc.:
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Parameters |
Children Mutual Fund |
Fixed Deposit |
PPF |
Sukanya Samriddhi Yojana |
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Rate of return |
Similar to hybrid mutual funds |
5.5 - 8.5% |
8% |
8.5% |
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Minimum Maturity Period |
Usually 5 years |
Flexible |
15 years |
18 years |
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Benchmark |
An index, like Nifty 50 |
None |
None |
None |
Major Advantages
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Long-Term Growth & Goal Achievement: Children's mutual funds in India invest for the long term, which is ideal for goals like education or marriage that are years down the line. They potentially benefit from market growth, accumulating a larger sum compared to traditional savings accounts.
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Disciplined Saving and 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.
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Tax Benefits: Investments in children's mutual funds can qualify for tax deductions under Section 80C of the Income Tax Act, reducing your taxable income. Additionally, gains on redeemed units after the child turns 18 may be subject to lower capital gains tax compared to regular equity funds.
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Professional Management and Diversification: Experienced fund managers handle the investment decisions, ensuring diversification across different asset classes. This helps mitigate risk and maximise potential returns compared to investing directly in stocks.
Children's mutual funds often provide investors with a choice between investment styles to suit their risk tolerance:
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Growth-Oriented Approach: For investors comfortable with a higher risk profile, hybrid equity-oriented funds allocate a larger proportion of their assets to equity schemes. This strategy has the potential for greater returns but carries the inherent volatility associated with stock markets.
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Stability-Focused Strategy: Investors seeking a more conservative approach can choose hybrid debt-oriented funds. These funds prioritise debt instruments, offering potentially lower but more predictable returns with less market fluctuation. This focus on stability aims to ensure a more guaranteed corpus for your child's future needs.
Things to Consider Before Investing in a Children’s Mutual Fund
Before choosing a mutual fund for child, it’s important to understand your goals, risk level, and investment timeline. These points will help you make a smart decision:
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Most mutual fund child plan options come with a lock-in period of around 5 years, so consider your liquidity needs before investing.
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The risk level can range from moderate to high. Assess your comfort with risk and choose a fund that matches your financial goals.
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Always compare the expense ratio, fees, and penalties of different funds, as these can affect your overall returns.
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Check each fund’s past performance and asset allocation to ensure it fits your investment strategy.
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Lastly, invest with a long-term view to maximise growth and achieve your child’s future milestones confidently.
Also, read How To Invest In Mutual Funds here.
Final Words
Investing in a children’s mutual fund in India is a great next step towards securing your child’s future. These funds are designed to help parents build a strong financial foundation for important life goals like education, marriage, or career aspirations.
When selecting from the best children’s mutual funds, consider options after assessing the risks and returns, to choose one that suits your investment goals and comfort level.
Before investing, remember a few key points: every children’s mutual fund in India comes with a lock-in period, so assess your liquidity needs carefully. Also, compare expense ratios, fund performance, and risk levels before making a decision.
Children’s mutual funds provide long-term growth potential, tax benefits, and professional fund management. By investing wisely and early, you can give your child a secure and financially stable future.
Open a free Demat account with Angel One today and start your child’s investment journey with confidence.