Best Childrens Funds

About Children's Mutual Funds

A Children’s Fund, or Child Gifting Mutual Fund, is an investment scheme tailored to address specific financial needs related to a child, such as education, higher education, healthcare, and marriage. These funds typically come with a mandatory lock-in period of 5 years or until the child reaches adulthood, whichever comes first.

Similar to other solution-oriented mutual funds, these funds are also poised as a solution to the rising costs of education and other future expenses. These investments aim to generate returns over time, which are distributed to investors as regular dividends, all while offering the potential for long-term capital gains.

How Do Children's Mutual Funds Work?

Children’s investment plans often incorporate a mix of equity and debt portfolios. This provides flexibility for investors to customise their investment strategy based on individual risk tolerance and time horizon. These plans offer options for a higher allocation to either debt or equity components.

Investors can choose between two types of Children’s Funds based on their investment horizon and goals:

  1. Equity-Focused: These funds allocate a significant portion (usually 60% or more) of their investments to equity-linked assets. This approach can potentially yield higher returns but comes with a higher level of associated risk.
  2. Debt-Focused: These funds primarily focus on debt assets, with 60% or more of their investments in this category. This provides investors with a higher level of security but may yield comparatively lower returns.

Child Gift Mutual Funds enable parents to create a separate fund dedicated to their child’s specific financial needs. This helps them keep their expenses separate from their child’s fund. When the child reaches 18, they can access the accumulated amount, which can be used to meet their financial requirements.

Typically, these investment plans come with a mandatory lock-in period of a minimum of 5 years. This lock-in period can be extended until the child reaches adulthood. Withdrawals before the maturity date are restricted, making these plans attractive for those with a long-term investment horizon. This limitation serves as a protective measure against market volatility.

Features of Children's Mutual Funds

  1. Fund Objective: Children’s Funds aim to offer a stable investment option for investors seeking long-term capital gains. Debt-focused funds provide steady returns with a small level of risk, while equity-linked funds may have short-term fluctuations but promise significant returns in the long run.
  2. Lock-in Period: Children’s Funds are locked for a minimum of 5 years or until the child reaches 18, whichever comes first.
  3. Exit Load and Expense Ratio: These funds have an annual expense ratio, and an exit load is applicable when redeeming the fund. AMCs typically charge a penalty of over 4% if you choose to withdraw funds before the 5-year lock-in period.
  4. Documentation: In addition to standard mutual fund documentation, Children’s Funds require proof of the child’s age, proof of the investor’s relationship with the child, and other relevant documents.

Advantages of Investing in Children's Mutual Funds

  1. Customised Child Investment Plans: Secure your child’s future with tailor-made investment options designed for parents or guardians who want to ensure financial stability for their kids.
  2. Mix of Debt and Equity: Choose from a range of child-specific schemes that offer a blend of debt and equity-based investments, allowing you to make informed decisions that align with your financial goals.
  3. Tax Benefits and Indexation: Enjoy tax benefits as an investor, with the added advantage of indexation to minimise tax liabilities. This smart feature helps you keep more of your hard-earned money.
  4. Worry-Free Parenting: Eliminate the stress of worrying about your child’s future. With these funds, your children can pursue their dreams with strong financial support in place.
  5. Special Benefits for Children with Disabilities: For parents of children with disabilities, these funds provide additional tax benefits. You can claim an annual exemption of ₹1500 per child on an annual interest income, further enhancing your financial security.

Risks Involved in Children's Mutual Funds

  1. Extended Lock-In Period: Children’s mutual funds typically come with a minimum lock-in period of 5 years. Premature withdrawals can result in a substantial penalty known as an exit load, which can be as high as 4%. It’s crucial to be mindful of this lock-in period and the associated penalties when selecting a fund.
  2. High Volatility: Mutual funds, including children’s funds, are subject to market fluctuations and can be highly volatile. The extent of volatility depends on the asset allocation within the fund. Equity-oriented child funds tend to be more volatile compared to debt-oriented ones. When choosing a fund for your child, it’s important to consider the level of volatility and assess your risk tolerance.
  3. Lack of Guarantees: Unlike some savings options, children’s mutual funds do not guarantee returns. The savings depend on market performance.

Factors To Consider Before Investing in Children's Mutual Funds

When it comes to planning for your child’s future, children’s mutual funds can be an excellent investment choice. However, before you jump into investing in these funds, there are some essential factors to keep in mind:

  1. Investment Goals: Children’s funds cater to various financial goals at different stages of your child’s life. They allow you to create a well-diversified investment portfolio tailored to your needs.
  2. Investment Duration: Children’s funds typically come with a mandatory lock-in period of five years. Parents or guardians can extend this duration until the child reaches 18 years. Be aware of this lock-in period and the associated penalties before choosing a fund.
  3. Returns and Performance: Past performance is not a guarantee of future returns, but it’s still important to analyse a fund’s historical performance. Look for consistency in generating significant returns and outperforming benchmark indices across different market cycles.
  4. Exit Load: Children’s mutual funds often have high exit loads, especially if you withdraw prematurely. These charges can be as high as 4%. Always consider the exit load before making an investment.
  5. Documentation: There’s a fair amount of paperwork involved in investing in children’s funds. Parents or guardians will need to provide official documents to establish their relationship with the child. Additional documents related to the child may be necessary during redemption.
  6. Lock-in Period: Keep in mind that the mandatory lock-in period of 5 years is in place to reduce the impact of market volatility on your investment. Be prepared for this before you invest.
  7. Cost of Children’s Funds: Children’s funds come with expenses, which are primarily the expense ratio and the exit load. The expense ratio covers various costs, such as transaction fees, fund management charges, and distribution costs. On the other hand, the exit load is a penalty for premature withdrawals. The expense ratio is a necessary cost, while the exit load can be avoided by staying invested until the lock-in period ends. Be sure to factor in these expenses when considering children’s funds.

Who Should Invest in Children's Mutual Funds?

This investment avenue is perfectly suited for parents who want to provide their children with a solid financial foundation to support their future.

Investing in a mutual fund designed for your child is a smart way to build a significant savings fund for their future. This financial tool offers several advantages, including tax exemptions and a guaranteed return on your investment, which can help grow your wealth over time. Additionally, it discourages early withdrawals by imposing penalties, ensuring that you stay committed to your long-term investment goals.

What makes this investment option even more appealing is its flexibility. It caters to both experienced investors looking for customisation options and new investors aiming to cultivate financial discipline. As an added benefit, when your child turns 18, the control and authority over the investment can be smoothly transitioned to them. All they need to do is complete their Know Your Customer (KYC) requirements with the financial institution.

Taxability of Children's Mutual Funds

  1. Tax Exemption on Interest Earnings: Investment options designed for children offer tax exemption on the interest earned. This benefit applies until the funds mature and the amount is disbursed. Charges are kept minimal to maximise indexation benefits.
  2. Tax Deduction for Parents under Section 80C: Parents can claim a deduction of up to ₹1.5 lakh from their taxable income by investing in such child-oriented funds.
  3. Annual Exemption for Interest Income: Under Section 10(32) of the Income Tax Act, 1961, parents can claim an annual exemption of ₹1,500 per child if the interest income exceeds ₹6,500 annually.
  4. Additional Tax Benefits for Parents of Children with Disabilities: Parents of children with specified disabilities can access additional tax exemptions by applying for children’s funds.

How To Invest in Children's Mutual Funds?

Investing in a Children’s Mutual Fund through your Angel One account is a straightforward process. Just follow these uncomplicated steps:

Step 1: Sign in to your Angel One account.

Note: If you don’t have an account with Angel One, you can quickly open a demat account by submitting the necessary documents.

Step 2: Choose a Children’s Mutual Fund that aligns with your financial goals and risk tolerance. You can find detailed information about each Children’s Mutual Fund on the Angel One app. Here’s what to consider:

  • Search for the specific fund you wish to invest in.
  • Assess the fund’s historical performance, tax implications, and its investment in various sectors and companies. You can also estimate potential returns using the calculator.
  • Evaluate the fund’s risk level, ratings, and expense ratio.

Step 3: After finalising the Children’s Mutual Fund(s) you want to invest in, log in to your Angel One account, navigate to the Mutual Funds section, and locate your chosen fund. Then, decide whether you want to invest through a Systematic Investment Plan (SIP) or make a one-time investment.

  • If you opt for SIP, select your preferred monthly SIP date.
  • Next, input the amount you intend to invest and choose your preferred payment method.
  • For SIP investments, you can set up an AutoPay for effortless future contributions.

By following these simple steps, you can seamlessly invest in a Children’s Mutual Fund through your Angel One account.

Top 8 Children's Mutual Funds to Invest in

Name of the fund AUM (in ₹ crore) Minimum Investment Amount (in ₹) 3Y CAGR (%) 5Y CAGR (%)
SBI Magnum Children’s Benefit Fund-Investment Plan 1180.63 5,000 44.47
ICICI Pru Child Care Fund-Gift Plan 1007.51 500 19.75 12.95
Aditya Birla SL Bal Bhavishya Yojna 826.37 1,000 15.91
Axis Children’s Gift Fund-Compulsory Lock-in 751.25 100 14.82 13.11
Axis Children’s Gift Fund-No Lock-in 751.25 100 15.05 13.29
Tata Young Citizen Fund 297.73 No Fresh Investments 23.31 16.92
SBI Magnum Children’s Benefit Fund-Savings Plan 100.73 500 14.77 10.87
LIC MF Children’s Gift Fund 14.17 3,000 14.94 12.45

*The data is as of October 19, 2023. The above-mentioned Children’s Mutual Funds list is for informational purposes only and is not a recommendation. The funds are sorted as per the 3Y CAGR, which is subject to change. Check out the real-time data on Angel One.

SBI Magnum Children’s Benefit Fund – Investment Plan

This fund focuses on long-term wealth creation for children and has shown an impressive 3-year CAGR of 44.47%. It boasts a relatively low expense ratio of 0.93% and requires a minimum investment of ₹5,000. This fund holds an AUM of ₹1,180.63 crore.

ICICI Pru Child Care Fund – Gift Plan

This fund aims to secure a child’s financial future and has a 3-year CAGR of 19.75%. This fund boasts an AUM of ₹1,007.51 crore. The expense ratio is slightly higher at 1.54%, and it allows a lower minimum investment of ₹500.

Aditya Birla SL Bal Bhavishya Yojna

With a 3-year CAGR of 15.91%, this fund offers a cost-effective option with an expense ratio of 0.66% and a minimum investment requirement of ₹1,000. This fund holds an AUM of ₹826.37 crore.

Axis Children’s Gift Fund – Compulsory Lock-In

This fund combines wealth generation with a compulsory lock-in period. It has a 3-year CAGR of 14.82%, and the expense ratio stands at 0.9, making it accessible to investors with a minimum of ₹100.

Axis Children’s Gift Fund – No Lock-In

Similar to the compulsory lock-in version, this fund also offers a 3-year CAGR of 15.05% with an expense ratio of 0.9. The minimum investment requirement remains at ₹100.

Tata Young Citizen Fund

With a 3-year CAGR of 23.31%, this fund provides an attractive investment option despite no fresh investments being accepted. Its expense ratio is relatively higher at 2.17%. Currently, the fund holds an AUM of ₹297.73 crore.

SBI Magnum Children’s Benefit Fund – Savings Plan

This savings-focused fund has a 3-year CAGR of 14.77% and an expense ratio of 0.88%. It requires a minimum investment of ₹500, making it a suitable choice for investors with moderate capital.

LIC MF Children’s Gift Fund

This fund targets long-term growth with a 3-year CAGR of 14.94%. However, it has a relatively higher expense ratio of 1.85% and demands a minimum investment of ₹3,000.

Mutual Funds Calculators

Children's Funds FAQs

What is a Children's Mutual Fund?

A Children's Mutual Fund is an investment vehicle specifically designed to help parents or guardians save and invest for their child's future financial needs, such as education or other life goals.

What is the ideal time to start investing in a Children's Mutual Fund for my child?

It's generally advisable to start as early as possible to benefit from compounding. The earlier you invest, the more time your investments have to grow.

Are investments in Children's Mutual Funds eligible for tax benefits?

Some Children's Mutual Funds may offer tax benefits under Section 80C of the Income Tax Act. Check with the fund provider for specific details.

Can I change the beneficiary of a Children's Mutual Fund?

Typically, you cannot change the beneficiary once the investment is made. However, you can open a new fund for another child if needed.

Are there any penalties for early withdrawal from a Children's Mutual Fund?

It depends on the fund's terms and conditions. Some funds may have exit loads or penalties of up to 4% for early withdrawals. It's important to understand these terms before investing.