The cost of education is increasing aggressively and way ahead of the return you get on traditional savings like Fixed Deposits. You require an investment option that should offer superior returns along with consistent and disciplined growth.
Children’s Mutual Fund is specially created to cope with such a challenge. It holds the high growth capability of the stock market, which is required for wealth creation, along with a lock-in period, which encourages disciplined long-term investing and benefit from the power of compounding over time.
This strategic investment will help your money grow at a rate that outperforms the increasing college fees, thus ensuring the substantial corpus is achieved in the next 10 to 15 years in order to give the best possible future to your child.
The Need for Growth
You must have read about inflation. It is the rate at which the prices rise. In India, the normal inflation rate is 5% or 6%. But the inflation rate in education is different. It rises by 10% to 12% on a yearly basis.
This means an Rs.10 Lakhs college education will cost Rs.30 Lakhs or more once the new-born turns 18 years old. If your savings are in a Fixed Deposit, it might not grow at a rapid enough rate to keep up with this large figure. You require market-linked growth, which means your investments should grow as the Indian economy flourishes.
What are Children’s Mutual Funds?
These are specific mutual funds and are classified by the market regulator SEBI as ‘Solution Oriented Schemes’. The ‘solution’ here may be financing your child’s major life events such as further studies or his/her marriage.
Unlike ordinary funds, these come with a special rule which will help you cut costs. There is a mandatory ‘lock-in’ period. This means that once you have deposited money, you cannot withdraw it for a period of 5 years or until your child is an adult 18 years.
This lock-in effect is actually an advantage. It prevents you from withdrawing this money for such things as buying a car or going for a holiday vacation. It holds your money inside and lets it grow.
Read Also: How to Compare Mutual Funds in India?
Top Mutual Funds Plan for Children
1. SBI Children’s Fund- Investment Plan
This fund has shown a very good performance and has given investors a return of 23% in the last 3 years. This mutual fund is volatile but powerful as well, in this the fund manager invests large amounts in equities and focuses on high growing sectors like finance and consumption. It is very high risk and is best suitable for long term investment (7+ years).
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 22.77% | 27.93% | 32.73% |
2. ICICI Prudential Child Care Fund (Gift Plan)
It has shown a strong performance with an annual return of 18% in the last 3 years and around 15% in the last 5 years. This is a balanced mutual fund which follows a dynamic asset allocation strategy that jumps between equity and debt to protect you during the market downturn. It is highly risky but it is reliable for long term investment of about 7-10 years.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 18.33% | 15.58% | 15.49% |
3. HDFC Children’s Gift Fund
This fund has a stable and consistent performance and has delivered 15% returns in a year for the last 3 years and about 16.5% in the last 5 years. This is a highly stable equity fund and here the manager maintains a large cap bias (stable players like HDFC Bank, ICICI bank), this helps in reducing the volatility. This is an aggressive hybrid fund that is highly risky and best suitable for parents that are looking to compound steadily.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 15.82% | 15.92% | 15.47% |
4. Tata Young Citizens Fund
It has a moderate performance with returns of 13% per annum over the last 3 years and about 14% for the last 5 years. This fund has about 96% exposure to the equity and behaves like a Flexi-Cap fund where investment is done across different companies. This fund is highly risky with no debt cushion and is much riskier than the hybrid options available in the market.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 13.41% | 13.83% | 5.61% |
5. SBI Children’s Fund – Savings Plan
This fund has given a return of 12% per annum in the last 3 years. You can get maximum stability in this as this is a debt based fund where investments are mainly in bonds which give fixed income with small investments in stocks. Here the risk is between moderate to high and it is best suited to save your capital rather than purely focusing on the growth.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 12.26% | 12.68% | 10.63% |
6. Aditya Birla Sun Life Bal Bhavishya Yojna
This fund has shown a moderate performance with 15% annual returns in the last 3 years. The fund focuses on growth and operates as a diversified equity fund that has a mix of large cap and mid cap stocks. It is high and is best suitable if you are looking for an equity based portfolio for your child’s future.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 16.99% | 12.67% | 13.09% |
7. LIC MF Children’s Fund
This fund has given a return of 11% in the last 3 years making it behind the other similar mutual funds. It has low AUM risk and even the size of the fund is small, which can result in liquidity problems or even expense ratio fluctuations. It is a very risky fund although the AUM is low with lower returns but other options in the market.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 12.45% | 10.01% | 10.20% |
8. UTI Children’s Equity Fund
This has shown a stable performance and has delivered 15% returns in the last 3 years and about 14% in the last 5 years. The fund manager follows a “Growth at Reasonable Price” (GARP) strategy, avoiding overly expensive stocks. This is a high risk based fund which has pure equity funds best suitable for aggressive investors.
| 3 Year Return (CAGR) | 5 Year Return (CAGR) | Returns Since Inception (CAGR) |
|---|---|---|
| 15.43% | 14.07% | 13..75% |
Overview of Best Mutual Funds Plan for Children
| Fund Name | Category | AUM (Rs.Cr) | Expense Ratio | No. of Stocks | Benchmark |
|---|---|---|---|---|---|
| SBI Children’s Fund- Investment Plan | Aggressive Hybrid | 5,053 | 1.83% | 38 | CRISIL Hybrid 35+65 Aggressive Index |
| ICICI Prudential Child Care Fund (Gift Plan) | Aggressive Hybrid | 1,424 | 2.17% | 91 | NIFTY 50 Hybrid Composite Debt 65:35 Index |
| HDFC Children’s Gift Fund | Aggressive Hybrid | 10,632 | 1.74% | 44 | NIFTY 50 Hybrid Composite Debt 65:35 Index |
| Tata Young Citizens Fund | Flexi Cap/Solution | 367 | 2.59% | 51 | NIFTY 500 TRI |
| SBI Children’s Fund – Savings Plan | Conservative Hybrid | 3,225 | 1.24% | 35 | NIFTY 50 Hybrid Composite Debt 15:85 Index |
| Aditya Birla Sun Life Bal Bhavishya Yojna | Flexi Cap/Solution | 1,203 | 2.15% | 72 | NIFTY 500 TRI |
| LIC MF Children’s Fund | Flexi Cap/Solution | 16 | 2.45% | 64 | CRISIL Hybrid 35+65 Aggressive Index |
| UTI Children’s Equity Fund | Flexi Cap/Solution | 1,180 | 2.22% | 61 | NIFTY 500 TRI |
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Key Features of Mutual Funds for Children
- Equity (Stocks): A major portion of it is invested in stock of companies. It is the portion that helps multiply your money quickly in a matter of years.
- Debt (Bonds): Some portion of the money goes to safe government bonds or to safe businesses. This portion functions as a safety cushion. If your stock goes down, this portion holds your entire money intact.
Aggressive and Conservative Plans
- Aggressive Plans: In these plans, the portfolio is mainly invested in the stock market (approximately 65% to 80%). It is suitable for the child if he/she is very young, as you will have more than 10 years to grow the savings. Higher growth is associated with higher risk, and time helps to overcome the risk.
- Conservative Plans: Money is mostly invested in secure bonds and a comparatively lower amount in stocks. This is ideal for your child if he or she is 15 years old already and the money is needed immediately. There is less point in risking the money if the target is achieved.
Advantages of Children’s Mutual Fund Plans
Replacing Your Future Self With Your Bigger Present Self
Compounding is simple arithmetic where your interest earns even more interest. By investing Rs.10,000 every month for 15 years at a 12% return, you can walk away with about Rs.50 Lakhs. The total amount that the principal put in was only Rs.18 Lakhs. The rest was house money, the money that your money made for you. Time is the best ingredient for this magic formula.
Lock-in Induced Discipline
We always tend to dip into our savings for short-term requirements. The 5-year lock-in in these funds rules that out. It legally assures that the money intended for your child’s college fees is not touched. We are told how the enforced discipline is the reason many parents opt for this over open-ended funds.
Education at High-Rate
The rate of inflation in education is well known to be on the order of 10% to 12%. Traditional savings like PPF give around 7.1%. The PPF’s actual purchasing power is falling relatively as the cost of education is rising.
Tax Benefits
You pay taxes your gains are taxed favorably even as you invest with your post-tax income. In case you sell the fund after a year, profit exceeding Rs.1.25 Lakh is at 12.5%. This is much lower than the 30% tax you might pay on Fixed Deposit interest if you are in the highest tax bracket.
Things to Consider Before Investing in Children’s Mutual Fund Plans
Assessing Time Horizon
The investment choice depends entirely on how many years remain until you need the money. If your child is 0 to 5 years old, you have a long horizon and should choose aggressive funds rich in stocks for maximum growth. If the child is 10 to 12 years old, a balanced approach is safer. However, if the child is over 15, you have very little time to recover from market crashes, so you must avoid risky equity funds and stick to safer debt funds or conservative plans.
Risk
Think about whether you can bear what happens when the investment value goes down temporarily. The stock market fluctuates and goes down and up. In the end, it goes up. However, for a short period, it can be alarming. If you tend to panic, select a fund that holds a larger amount of debts such as HDFC Children’s Fund.
Minimizing Costs
Every mutual fund incurs an expense ratio. Always select the Direct Plan while making an investment. This is possible through apps like Zerodha or Groww. The Direct Plan incurs lower expense ratios (approximately 0.8% to 1%) in contrast to the Regular Plan (approximately 2%). The difference of 1% in 15 years results in a massive difference.
Regulatory and Tax Implications
Opening the Account
These funds are opened in the name of the Minor Child. You will be the Guardian. You cannot add a joint holder. The investment belongs to the child. You need the child’s birth certificate and your own KYC documents (PAN/Aadhaar) to open the account. The money can come from your bank account or the child’s bank account.
Clubbing of Income
Income earned by a minor is added to the parent’s income for tax purposes (“Clubbing”). You get a small exemption of Rs.1,500 per child per year. However, you only pay tax on mutual funds when you sell. If you hold until the child turns 18, you defer the tax liability.
Child Turning 18 (Minor to Major)
When the child turns 18, the account freezes. You must submit a “Minor to Major” application. The child (now adult) needs their own PAN card, bank account, and KYC. The control of the money legally shifts to the child.
Read Also: Best Safe Investments with High Returns in India
Conclusion
Future security is the best gift you can give a child. When you plan now, you help make sure that money won’t stand in the way of your child’s education or career.
A child mutual fund gives you the discipline of a lock-in and the benefit of market-linked gains. The same effect can be noticed in funds like the SBI Magnum Children’s Benefit Fund which has proved that one can significantly beat inflation with right strategy. Keep that in mind, start early. Even if you can’t start big, start now. Small sacrifices now will build a mountain for you child to stand on tomorrow.
Frequently Asked Questions (FAQs)
Can the invested amount be withdrawn before the lock in period is over?
No, the lock-in period is a mandatory factor in these funds. You cannot withdraw the money before the lock in period or until the child turns 18.
Who pays the tax on the gains?
As long as the child is a minor the parent (guardian) pays the tax on the gains. The income is clubbed with the parent who earns more. Once the child turns 18 they become responsible for the tax on any future gains.
What documents are required before opening the minor account?
A child’s birth certificate or passport is the primary document that is required as this is the age proof, also PAN card and Aadhar card of the parents or guardian is required.
Can I invest the money on my name or is it mandatory to do the investment on a child’s name?
You can invest in either of them as it is totally your choice and there is no tax benefit if you do it on a child’s name due to the clubbing provision.
What happens if I die?
If the guardian passes away a new guardian (usually the other parent or a court-appointed legal guardian) must be registered with the fund house.
