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Children specific mutual funds-What are they, how do they work?

  • Akshatha Sajumon
  • Jan 12 2022
  • 7 minutes
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Being a parent comes with multiple responsibilities and how one executes these will define their children’s future. Every parent wants a good education and a bright future for his/her child. But very few are aware of the expenses that they have to bear for ensuring these. 

For appropriate financial planning, many people turn to mutual funds. The best option for a parent to plan their children’s future is to invest in a child-plan mutual fund. Here, we will discuss children, specific mutual funds, and all the associated factors for parents to ensure investment.

What is a children’s gift mutual fund?

Children’s gift mutual fund is an investment scheme designed to provide financial aid which can be used in a child’s education and other child-related expenses. The investment in child plan funds is hybrid: these mutual funds primarily invest in equity and debt-oriented funds. A child plan mutual fund comes with a five-year lock-in period, which can be extended until the child reaches adulthood. The investment ensures financial safety for the child as it restricts the investor from withdrawing the money until the fund reaches its maturity.

What is the purpose of a children’s fund?

The basic purpose of a children’s fund is to ensure financial support for a child’s future if they wish to pursue higher studies abroad or in India, or a career that demands higher expenses or for higher studies in well-known institutions. The mutual fund ensures that parents do not have to compromise on their child’s growth due to a lack of finances.

A child plan fund is a better choice as compared to opting for an educational loan. With these, you can get maximum and assured returns on the money you invest. Parents can opt for a minimum of five years or more extended lock-in period for the funds until their child turns 18. And if an investor considers liquidation of the child plan mutual fund before its minimum lock-in period of five years, then the fund house could charge a penalty of up to 4%.

Taxability on Child specific mutual funds

Parents can benefit from investing in child plan funds since the tax on the interest earned is tax exempted. A minimum amount of tax is imposed only when the maturity period is over and the fund amount is disbursed.

If parents invest in such funds, they can avail tax exemption from their income under Section 80C and Rs. 1.5 Lakh can be claimed for deduction. For annual interest income exceeding Rs. 6,500, as per Section 10(32) of the Income Tax Act, parents can claim an annual exemption of Rs. 1,500 for a child. For children with disabilities, if parents apply for a children’s fund, then they can get additional tax benefits.

Benefits of child fund plan

Some key benefits of children-specific mutual funds are as below:

  • Parents can opt for a customized or tailor-made fund scheme while applying for a children’s gift mutual fund scheme.
  • A child-specific mutual plan is a debt-based scheme that will save investors from tax implications if it is not redeemed before the maturity period.
  • The benefit of indexation helps to minimize the amount of tax imposed.
  • Parents don’t have to worry about their child’s future, as their children can attain different goals at different times with sufficient financial back-up as required.

How do ChildFund Plans compare with Sukanya Samriddhi Yojana?

Parameter Sukanya Samriddhi Yojana Children Mutual Funds
Who is Eligible Account must be in the name of girl child The account can be in the name of a girl or boy child
Age Limit Minimum age requirement is 3 months. The maximum age limit is 10 years No minimum age requirement. The maximum age limit is 18 years.
Who Manages Account Parents or legal guardian have to operate the account until the girl child turns 18 years old, post which she takes control of the account Parents or legal guardians operate the investment account
Returns Fixed (It is currently 8.5% per annum) No fixed interest rate. It depends on the market factors.
Number of accounts  Maximum two accounts can be opened for a family with two or more daughters. No restriction on the number of accounts that can be opened.
Risk Risk-free as sovereign guarantees back the scheme Can carry some amount of risk due to market fluctuations.
Lock-in period 21 years from the date of opening the account 18 years from the date of opening the account
Investment limit Rs. 1.5 lakhs per year No limit
Premature withdrawal Allowed only after the girl child attains the age of 18 years. Allowed after the completion of three years lock-in from the date of opening the investment account.
Maintenance cost No maintenance cost. The expense ratio is charged by AMC on a yearly basis.

 

Are Children’s Gift funds balanced funds or hybrid funds?

Since children’s gift funds invest in both equity and debts, they can be classified as balanced funds or hybrid funds. Hybrid funds are further classified into two broad terms: hybrid equity-oriented funds and hybrid debt-oriented funds.

  • Hybrid Equity-oriented Funds – If 60% of your funds are invested in equity, then it will be known as hybrid equity-oriented funds, and the assets of the funds will have higher exposure to equity than debt products.
  • Hybrid Debt-oriented Funds – If 60% of your funds are invested in debt products, then it will be called hybrid debt-oriented funds, and the assets of the funds will have higher exposure to debt products than equity.

Who should invest in a Children’s Fund?

The child plan fund is ideal for those looking for a long-term investment primarily to save for child-related expenses. Those who don’t want to get involved in schemes with huge risks and want good returns can also invest in children’s mutual funds. Most child plan mutual funds are customizable, which offers additional relief to investors. Once a child turns 18, the authorization can be handed over to them through a process of KYC from the financial institution.

Conclusion

Though there are many other savings schemes available in the market, the Children’s Gift Mutual Fund is the best option available to secure the future of one’s children. These come with benefits that can help in gathering sufficient savings to be used for a child’s education, career needs, etc


Frequently Asked Questions

Which mutual fund is best for child education?
Parents must select a fund out of children’s mutual fund options to ensure that all education-related expenses can be covered in the future. These help in reducing any financial pressure on parents while providing for their children’s future needs.

Can I buy a mutual fund for my child?
Yes, you can easily buy a children’s mutual fund for your child provided you and your child meet the eligibility criteria set by the AMC. 

Which is a better option, a Child plan or a mutual fund?
Depending on an investor’s needs, both child plans and mutual funds offer several benefits. Child plans are primarily meant for providing financial support to cover education and career-related expenses of children. Mutual funds, on the other hand, can act as investments for portfolio diversification depending on individual financial goals.

How do I plan for my child education fund?
Depending on the expected cost of your child’s education, you can invest in a child mutual fund to ensure reasonable financial support in the future. This way, you don’t have to bear the financial burden and still ensure that your child’s higher education needs are met.

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