Children's Mutual Funds: Guide to Secure Your Child Future

Raising children involves more than just providing daily necessities—educational costs, extra-curricular activities, and even marriage expenses can add up quickly. As the cost of living rises, it becomes critical to plan for your child’s future early on. That’s where children’s mutual funds come in. These specialised schemes are designed to foster long-term wealth creation, specifically earmarked for a child’s future needs. By learning about how to invest in children’s mutual funds, parents gain a tool that can help them meet big-ticket expenses in a structured way.

• Table of contents

• Defining a children’s mutual fund
• Key features
• Why are children’s funds created?
• Common goals addressed
• Who might benefit from child mutual fund plans?
• Suitable investor profiles
• Key advantages of investing in children’s funds
• Potential risks of child mutual funds
• Tax implications for child mutual fund plans
• Essential factors before you invest in children’s mutual funds
• Steps to invest in child mutual fund plans
• 5 steps to plan for your child’s future
• Investment rules for planning child education with mutual funds

Defining a children’s mutual fund

So, what are children’s mutual funds exactly? These fall under the category of ‘solution-oriented funds’. These schemes are tailored to long-term goals such as financing education or major life events. For example, you can plan this investment as a mutual fund for child education. Typically, the account is opened in the child’s name but managed by a parent or guardian until the child reaches adulthood. The investment strategy may vary, but many funds maintain a balanced portfolio of equity and debt to balance long-term growth potential and relative stability.

Key features:

• Lock-in or restricted withdrawals: Such funds have a lock-in period of five years or until the child attains age of maturity, whichever is earlier.
• Goal-oriented: The fund’s structure aligns with long-term goals such as higher education. This is why investing in a mutual fund for child education is considered beneficial.
• Flexibility: Mutual funds provide flexibility, both in how much you invest and how you manage withdrawals after lock-in completion. You can withdraw the entire amount, or you can stay invested and withdraw the desired amount as and when you need funds (subject to available corpus).

Why are children’s funds created?

At their core, child mutual fund plans have a primary objective: to strengthen a child’s financial future through long-term investing. Children’s funds aim to build a sufficient corpus by potentially capitalising on market growth opportunities over extended periods. Since children typically have time on their side, the power of compounding can turn modest monthly contributions into a sizable sum down the road.

Read Also: What is a mutual fund: Meaning, types, and benefits

Common goals addressed

• Higher education: University costs can skyrocket, especially if you aim for renowned global institutions.
• Extracurricular excellence: Whether it’s sports training or arts programs, specialised interests can be expensive.
• Marriage and other milestones: Major life events often come with large bills, making prior planning essential.

Who might benefit from child mutual fund plans?

Choosing to invest in children’s mutual funds isn’t limited to parents alone. Grandparents, other relatives, or legal guardians can also use these funds to secure a child’s financial future. Essentially, anyone responsible for a minor’s upbringing and education, or anyone looking to gift a meaningful financial instrument, can leverage these schemes.

Suitable investor profiles

• Parents of new-borns: Starting early offers an extended investment horizon.
• Guardians of young children: Even if your child is already in primary school, you can still benefit from 5–15 more years of compounding.
• Relatives or grandparents: Child mutual funds can be a thoughtful long-term gift.

Key advantages of investing in children’s funds

• Disciplined investing: Systematic Investment Plans (SIPs) help you regularly contribute a fixed amount to a mutual fund, harnessing the power of compounding and mitigating volatility risk through rupee-cost averaging. Alternatively, those who prefer to invest large amounts can opt for lumpsum.
• Lock-in discipline: The five-year lock-in ensures you won’t dip into the funds impulsively.
• Professional management: Like other mutual funds, these plans have expert fund managers optimising the portfolio for balanced growth.
• Varied risk profiles: Depending upon the scheme and fund house, children’s funds can be debt-oriented funds, equity-oriented or hybrid, catering to varying risk appetites.

Potential risks of child mutual funds

While child mutual fund plans can be an effective way to plan financially, they are not immune to risks:

• Market volatility: All market-linked investments involve some risk. The equity portion especially can be impacted by volatility, economic conditions and market trends.
• Credit risk (debt portion): The debt portion of the fund can face credit risk (risk of default by the debtor) and interest rate risk. The former can be mitigated by investing in high quality securities.
• Lock-in constraints: While the lock-in is often beneficial for discipline, it also reduces liquidity.
• Uncertain returns: Unlike fixed-return instruments, mutual fund performance varies with market conditions.

Read Also: What types of mutual funds are suitable for new investors?

Tax implications for child mutual fund plans

• Ownership and taxation
  • Capital gains: On redemption, capital gains are taxed similarly to other mutual funds. If it’s an equity-oriented scheme, gains over Rs. 1.25 lakh in a financial year are taxed at 12.5%. For debt-oriented schemes, the tax rate is as per the prevailing income tax slab.

Essential factors before you invest in children’s mutual funds

• Time horizon: Since these funds have a lock in period of five years, your investment horizon needs to meet or exceed that.
• Fund objective and composition: Examine equity vs. debt distribution. More equity might offer higher return potential over time but comes with increased volatility.
• Expense ratios: Higher expenses can eat into net returns over time. Compare the fee structures of different funds.

Steps to invest in child mutual fund plans

• Choose a trusted AMC: Opt for reputable fund houses with strong track records and transparent disclosures.
• Decide on fund category: Determine if you want a predominantly equity-based scheme for higher growth, balanced approach for lower risk or a debt-oriented scheme for a more conservative approach.
• Invest through lump sum or SIP: A lump sum might be suitable if you have a substantial amount ready. Alternatively, a SIP spreads contributions out, reducing the impact of market volatility.
• Monitor periodically: While the investment is for the long haul, reviewing the fund’s performance occasionally ensures you’re on track.

5 steps to plan for your child’s future

Here are the 5 steps to secure your child’s future with mutual funds:

Set clear goals

One of the first steps to secure your child’s future is to determine your financial goals for them, such as education, healthcare, and so on. You can create a single overarching goal where you save and invest holistically towards your child’s financial future. Or you can create separate goals for school admissions, higher education, healthcare, weddings, and so on. Be specific about the amount required for each goal and the timeframe to achieve them. You may also want to invest in different mutual fund schemes depending on the nature of the goals. However, a little bit of timely financial planning can go a long way in ensuring financial stability for your child and a sense of fulfillment for you.

Invest in mutual funds keeping your risk appetite in mind

Assess your risk tolerance and choose mutual fund schemes that align with your risk profile. You may want to diversify your portfolio to keep the risk lower. If you are starting a little later than you would have ideally wanted to, you can invest in flexi cap funds or other types of actively managed schemes.

Equity and equity-oriented funds tend to offer relatively reasonable returns, especially in the long term. However, they also come at a higher risk level. Debt mutual funds may suit you if you have a low-risk appetite.

Start a systematic investment plan (SIP)

SIPs allow them to start investing with small amounts and are also flexible regarding the installment amount, frequency, and scheme tenure. Another benefit of investing in mutual funds with an SIP is that you can automate the investments. This means that the money will be automatically invested into the fund from your account without you playing an active part in it.

SIPs encourage disciplined investing and help you benefit from rupee-cost averaging, where you buy more units when prices are low and fewer when prices are high. You can increase the installments as your income increases.

Review your investments periodically

When you sit down for your financial planning session, you must also decide how often you will review your financial plan. Experts suggest a biannual or quarterly review for most investors. Periodically reviewing your mutual fund investments ensures they are on track to meet your goals. Therefore, adjust your portfolio as needed to account for changing circumstances or risk tolerance.

Liquidate your mutual fund investments wisely

One of the last steps to secure your child’s future with mutual funds is to pay attention while liquidating your investment. Mutual funds offer liquidity, allowing you to access your money whenever you need it for funding unforeseen expenses or emergencies. You may also want to withdraw partially or fully from your mutual fund investment to meet your child’s needs. However, this affects the tax implications on your capital gains.

Hence, always plan your liquidation strategy so that you can reduce the tax liabilities on your mutual fund returns. Debt funds and equity funds are taxed differently, and the tax rate also depends on how long you hold them. If you liquidate the investment too soon, you may have to pay Short-term Capital Gains (STCG) tax which usually turns out to be relatively higher than Long-term Capital Gains (LTCG) tax.

Investment rules for planning child education with mutual funds

Rule 1: Be Consistent and Start Early

Investing early is one of the best practices. The compounding effect, which enables your money to generate returns on both the original investment and the accrued interest over time, might be advantageous if you start early. It is equally crucial to be consistent.

Rule 2: Clearly State Objectives and Establish the Investment Horizon

Establishing a definite budget for your child's education is essential before you invest in mutual funds. To arrive at a reasonable figure, determine the projected expenses and account for inflation. Factor in the investment's term horizon as well.

Rule 3: Make Your Portfolio More Diverse

Investing fundamentally relies on diversification. Invest in various mutual fund categories to lower the risk and enhance the possibility of gains. A well-diversified portfolio may assist in achieving a risk-return balance, giving your child's education fund a relatively steady growth trajectory.

Rule 4: Recognize Your Risk Tolerance

When making educational investments for your kid, knowing how much risk you can afford is important. The risk associated with each mutual fund category varies, so it's critical to match your investing decisions to your degree of risk tolerance.

Rule 5: Keep Up to Date and Review Often

Stay informed on the state of the economy, changes in mutual fund laws, and the performance of the funds you have selected. Make sure your investments align with your risk tolerance and objectives by periodically reviewing your portfolio. Rebalance your portfolio as needed to maintain the correct asset allocation.

Rule 6: Selecting Appropriate Mutual Fund Schemes

Choosing the appropriate mutual fund schemes is essential for reaching your financial objectives. Consider variables including the fund management’s track record, fee ratios, and fund’s investment goal. Debt funds might provide relative stability for immediate requirements, while equity funds can be more suited for long-term objectives.

Rule 7: Make Use of SIPs

SIPs for mutual fund investments are very useful, especially when planning for goals such as funding your child’s education. By purchasing more units of a mutual fund when the price is low and fewer when it rises, investors can mitigate the impact of market fluctuations. Additionally, this approach instills financial discipline, allowing investors to maintain a consistent investment strategy.

Conclusion

Children’s mutual funds can provide an efficient route for potential long-term wealth creation, specifically targeting a child’s future educational or personal milestones. By harnessing the power of compounding, these dedicated funds can help parents or guardians avoid the last-minute scramble for finances. Investing in a mutual fund for child education can be a suitable way to build long-term wealth for future academic expenses. While there are certain risks and lock-in conditions to keep in mind, prudent planning—along with an understanding of tax norms and scheme features—can make child mutual fund plans a suitable component of your financial strategy if they align with your risk appetite.

FAQs

What does children’s fund refer to?

A children’s fund is a solution-oriented mutual fund scheme created to meet long-term financial needs related to a minor’s future. Such mutual funds for kids often incorporates both equity and debt instruments, focusing on balanced or growth-oriented portfolios.

What is the lock-in period for children’s funds?

The lock-in period for children’s funds is five years or until the child reaches age of majority, whichever is earlier.

Is there any requirement for investing in Children’s Funds?

You typically need to fulfill KYC (Know Your Customer) formalities on behalf of the minor. The guardian’s identity proof, address proof, and relationship documents may be required. Check each AMC’s policy for specific details.

Can I invest in a mutual fund for my child?

Some fund houses in India offer child-focused funds tailored for education or other long-term goals. You can invest through lump sum or SIP modes, depending on your financial capacity. A children's mutual fund India offers a structured way to invest in a mutual fund child plan focused on long-term goals like education.

Which is better – child plan or children’s mutual fund?

This depends on individual preferences and financial goals. Traditional child plans (like certain insurance policies) might offer fixed returns or insurance coverage but can come with higher costs and limited flexibility. Children’s mutual funds, on the other hand, may provide higher growth over time and more investment freedom, though returns are market-dependent.

When should I start investing in mutual funds for my child's future?

This depends on individual preferences and financial goals. Traditional child plans (like certain insurance policies) might offer fixed returns or insurance coverage but can come with higher costs and limited flexibility. Children’s mutual funds, on the other hand, may provide higher growth over time and more investment freedom, though returns are market-dependent.

Which is better – child plan or children’s mutual fund?

It's ideal to start as early as possible to benefit from the power of compounding.

How can I mitigate impacted from market volatility on my child’s education fund?

Choose a mix of equity and debt mutual funds to balance risk and consider starting with a conservative allocation that becomes more aggressive over time.

Why is early mutual fund investment important for a child's education?

It is essential to begin investing early to take full advantage of the compounding effect. Thanks to compounding, your money may provide returns on both the original investment and the interest that has accrued over time. Starting early allows you to develop your assets and maybe accumulate a sizable sum for your child's education.

Are mutual funds a stable option for investing in child education?

While mutual funds are not completely risk averse, they still have potential to generate returns over long term for their investors. Deciding a mutual fund scheme based on your goals, risk appetite and time horizon can prove to be a stable option for your child’s future.

Can I invest in mutual funds for children education planning with a small amount?

Yes, you can start investing in mutual funds through an SIP for your child’s education. This provides a low amount investment option.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.