Child Oriented Mutual Funds

Child oriented mutual fund or children’s fund is a fund for child-specific goals. It is one category of mutual funds where parents invest for their children’s future requirements. These requirements could vary from child’s education to marriage. SEBI defines a solution-oriented Children’s fund as an open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains age of majority, whichever is earlier.

Everyone is aware about the ever-increasing costs of education and other imperative expenses due to inflation. In order to be well equipped with financial resources to meet their children’s future needs, Parents go for child-oriented funds. When children attain the age of 18, parents do not have to bear much burden because Children’s Funds will take care of their needs.

Let us take an example and see how you can attain your financials goals for your children in a given period through the mutual fund investments. Mr. ‘S’ want to invest for his child education ₹ 20,000 every month each in children debt-based funds, Hybrid funds and equity mutual funds. Mr. S has set a target of 1 crore after 15 years as his child is currently 3 years old. Let us see how he can achieve this:

Let us assume

Expected annual returns on Debt fund is 8%; invested for 15 years

Expected annual returns on balanced fund is 10%; invested for 15 years

Expected annual returns on equity mutual fund is 15%; invested for 14 years

Now look at the returns

Debt fund gives ₹ 69 lakhs

Balanced equity fund gives ₹ 83 lakhs

Equity mutual fund gives ₹ 1.14 crore in just 14 years

You could see from the above example that while debt and balanced funds involve minimal risks, their returns are also comparatively moderate. But equity mutual fund involves higher risks but provides ₹ 1 crore corpus. Depending upon your risk appetite and time horizon you can opt any mix of debt and equity.

Fund houses have customized investments option to meet the individual financial goals of the investors. These Funds invest both in equity and debt portfolios and the investors can choose any mix of these two depending upon the risk appetite and the time for which they want to lock in their investments. However, Child oriented mutual funds demand a minimum lock in period of 5 years and could be extended to a period when child turns into adult. Investors cannot exit or withdraw money from the funds until the maturity which makes them suitable for longer terms. The penalty is extremely high around 3% to 4% in India if investors redeem their money before maturity which induces investors to stay for longer times. Funds can make profits by earning more interest over a longer period. It further helps in preventing investors against the risk of volatility.

Why do investors invest in Children’s funds?

These funds offer a balanced mix of equity and debt-oriented funds. Investors can choose as per their risk profile. Investor having tendency to take higher risks can go for hybrid equity-oriented funds as these funds invest majorly in equity assets which offer higher returns. An investor who wants moderate returns with less risk can go for hybrid debt-oriented fund which invests a larger part in debt-oriented products.

Future ready: It relieves the financial burden of the parents as they are ready to meet the financial contingencies easily. Parents can provide better education facilities to their children by choosing to invest in children’s funds.

Finances for each stage of their Child: Children’s Funds allow the investors to do financial planning in a phased manner. For example- Investors would be having enough funds from pre-primary education to college education of their children.

Taxability: When investors want to invest in debt-oriented children’s funds, they can enjoy tax exemptions in India. Investors do not have to pay taxes until the fund matures as Interest earned on child mutual fund investments is tax exempted. Tax must be paid when the funds mature. Therefore, these are good for long-term investments. There are certain exemptions as mentioned below:

a. Parents can get exemption from their income under Section 80C. They can claim up to ₹ 1.5 Lakh deduction.

b. They can also get an annual exemption of ₹ 1,500 per child under Section 10 (32) of the Income Tax Act, 1961 if the interest income exceeds ₹ 6,500 annually.

c. Parents of differently abled children can also get exempted from additional tax exemptions if they invest in children’s fund.

What are the things you should keep in mind before investing in children’s funds?

Goals: While investing in Children’s funds, you should first understand your goals clearly. Be clear whether you want to invest for education, marriage, health or foreign education etc. Then, look at which funds suit your goals best so that the objective is financially aligned with future needs.

Time: How long do you want to invest and what amount of time will be enough to meet your future needs?

Expenses: It is a good practice to take a note of the overall expenses incurred in the process and how much fees is going to fund managers .The exit load is heavy in children’s funds so unless an emergency do not pull out your money from the fund.

KYC: The Know Your Customers details are submitted while investing in the fund so make sure you enter all information correct as once funds mature it will automatically get transferred to the child’s name.