Last Updated on Jun 18, 2024 by Anjali Chourasiya
Every parent wants to secure their child’s future. And with the increasing cost of education and living in India, it is wise to start the investing journey when the child is young. One of the best ways to secure your child’s future is through children’s mutual funds. Mutual fund schemes for children, commonly known as Children Gift Funds, provide returns that can offer financial benefits to your children in meeting expenses such as future education and marriage needs. In this article, let’s explore mutual funds for children in detail, along with their advantages and limitations, a list of the best mutual fund plans for children, and more.
Table of Contents
What are Children’s Funds?
A children’s fund is an open-ended mutual fund aimed at child-specific goals, like meeting educational expenses and healthcare. The fund usually has a mandatory lock-in period of 5 yr. It can be extended until the child becomes a major.
Children’s funds can be considered a good solution-oriented plan to tackle the rising cost of education and other expenses. Moreover, investors cannot prematurely withdraw the money invested in the fund, making it an idle long-term investment.
Best Mutual Funds For Children (2024)
| Name | AUM (Rs. in cr.) | Expense Ratio (%) | CAGR 3Y (%) | CAGR 5Y (%) |
| Tata Young Citizen Fund | 339.36 | 2.18 | 17.32 | 18.82 |
| ICICI Pru Child Care Fund-Gift Plan | 1,257.91 | 1.38 | 20.81 | 16.63 |
| Aditya Birla SL Bal Bhavishya Yojna | 988.03 | 0.66 | 14.14 | 14.13 |
| LIC MF Children’s Fund | 15.70 | 1.72 | 13.39 | 13.31 |
| Axis Children’s Gift Fund-No Lock in | 811.61 | 1.16 | 10.56 | 13.18 |
| Axis Children’s Gift Fund-Compulsory Lock in | 811.61 | 1.16 | 10.32 | 12.99 |
| SBI Magnum Children’s Benefit Fund-Savings Plan | 110.77 | 0.86 | 12.60 | 12.33 |
Note: The data is from 7th June 2024 and sorted using Tickertape Mutual Fund Screener using the below-mentioned parameters:
- Category > Others > Solution Oriented – Children’s Fund
- Plan: Growth (default)
- CAGR 5-yr (Sort from high to low)
🚀 Pro Tip: Use Tickertape’s Mutual Fund Screener to filter and compare funds based on performance, expense ratio, and risk. Find funds that match your goals and risk tolerance for smarter investment choices.
Overview of the Best Children Mutual Fund
Tata Young Citizen Fund
Tata Young Citizen Fund is designed to help parents invest in their children’s future, focusing on long-term capital appreciation. The fund’s objective is to generate returns through investments in a diversified portfolio of equities and equity-related instruments.
As of 7th June 2024, Tata Young Citizen Fund has an Assets Under Management (AUM) of Rs. 339.36 crore. The expense ratio of the fund is 2.18%, which indicates the percentage of assets deducted annually to cover management fees and other expenses. The fund has demonstrated strong performance with a Compound Annual Growth Rate (CAGR) of 17.32% over the past three years and 18.82% over the past five years.
ICICI Prudential Child Care Fund – Gift Plan
The ICICI Prudential Child Care Fund – Gift Plan aims to provide long-term capital appreciation through a diversified portfolio of equity and equity-related securities, specifically structured to meet the needs of young investors and their future financial requirements.
This fund boasts an AUM of Rs. 1,257.91 crore, making it one of the larger funds in this category. The expense ratio is relatively low at 1.38%. It has shown impressive growth with a three-year CAGR of 20.81% and a five-year CAGR of 16.63%, highlighting its robust performance over time.
Aditya Birla Sun Life Bal Bhavishya Yojna
Aditya Birla Sun Life Bal Bhavishya Yojna is tailored to build a corpus for children’s future needs by investing in a mix of equity and debt instruments, aiming to provide capital appreciation along with some stability.
The fund manages an AUM of Rs. 988.03 crore. It has a very competitive expense ratio of 0.66%, which is one of the lowest among its peers. The three-year CAGR stands at 14.14%, while the five-year CAGR is 14.13%, indicating consistent performance.
LIC MF Children’s Fund
LIC MF Children’s Fund is aimed at helping parents save and invest for their children’s future, providing an opportunity for long-term capital appreciation through a diversified portfolio of equity and equity-linked instruments.
This fund has an AUM of Rs. 15.70 crore, making it one of the smaller funds in this category. The expense ratio is 1.72%. It has recorded a three-year CAGR of 13.39% and a five-year CAGR of 13.31%, reflecting steady growth.
Axis Children’s Gift Fund – No Lock-in
The Axis Children’s Gift Fund – No Lock-in is designed to provide a mix of capital appreciation and income generation over the long term by investing in a diversified portfolio of equity and debt instruments.
The AUM of this fund is Rs. 811.61 crore. It has an expense ratio of 1.16%. The fund has achieved a three-year CAGR of 10.56% and a five-year CAGR of 13.18%, showing moderate but stable growth.
Axis Children’s Gift Fund – Compulsory Lock-in
Axis Children’s Gift Fund – Compulsory Lock-in is similar to the no lock-in variant but comes with a lock-in period, encouraging long-term investment for children’s future needs.
This fund also manages an AUM of Rs. 811.61 crore, with an expense ratio of 1.16%. The three-year CAGR is 10.32%, and the five-year CAGR is 12.99%, indicating a steady performance.
SBI Magnum Children’s Benefit Fund – Savings Plan
SBI Magnum Children’s Benefit Fund – Savings Plan aims to generate long-term capital appreciation through a diversified investment in equity and debt instruments, catering to the financial needs of children.
This fund has an AUM of Rs. 110.77 crore. It has an expense ratio of 0.86%. The three-year CAGR is 12.60%, and the five-year CAGR is 12.33%, reflecting consistent returns over time.
Features of Children’s Funds
- Lock-in Period: Investors in Children’s Funds commit to a lock-in period of a minimum of 5 years or until the child reaches 18 years of age, whichever comes first. This lock-in period ensures a disciplined, long-term investment approach, aligning with the specific financial goals associated with a child’s future needs.
- Systematic Investment Plans (SIPs): Child-oriented mutual funds often facilitate investment through SIPs, allowing parents or guardians to make regular, smaller contributions over time. This promotes disciplined and systematic investing.
- Risk profile: These funds are typically considered to have a moderate risk profile. While they may have exposure to equities for potential growth, they often include a mix of debt instruments to provide stability and mitigate risk. Hence, analysing your risk profile and whether it matches the fund can be worthwhile.
- Objective of the Fund: The primary objective of Children’s Funds is to provide a stable investment avenue geared towards long-term capital gains. Investors can choose between debt-focused and equity-linked funds based on their risk and return preferences. Debt-focused funds offer stable returns with minimal risk, whereas equity-linked funds, while subject to higher short-term fluctuations, promise significant returns over an extended period.
- Flexibility: Child-centric mutual funds often offer flexibility in terms of withdrawal options. This may include partial withdrawals or systematic withdrawal plans to meet specific financial needs as they arise.
- Education Benefits: Some mutual funds for children may come with added benefits like insurance cover or waivers of future premiums in case of an unfortunate event, ensuring the continuity of the investment plan.
- Diversification: To manage risk effectively, these funds typically diversify their investments across various asset classes, such as equities, bonds, and money market instruments.
- Professional Fund Management: Child-oriented mutual funds are managed by experienced fund managers who make investment decisions based on market conditions and the fund’s objectives.
- Tax Benefits: Certain mutual funds for children may offer tax benefits under Section 80C of the Income Tax Act, allowing investors to avail deductions on the invested amount.
- Exit Load and Expense Ratio: Children’s Funds come with an annual expense ratio, representing the cost associated with managing the fund. Additionally, investors may incur an exit load when redeeming the fund, which should be considered as part of the overall cost structure associated with investing in Children’s Funds.
Before investing in any mutual fund for children, it’s essential for parents or guardians to thoroughly understand the fund’s features, risk factors, and investment strategy. Consulting with a financial advisor can help make informed decisions based on individual financial goals and risk tolerance.
Why Should You Consider Investing in Mutual Funds To Secure Your Child’s Future?
Bank Fixed Deposits, Unit Linked Insurance Plans (ULIPs), endowment plans and other traditional saving instruments offer a low-interest rate. Plus, the interest received on bank deposits is taxable according to the investor’s income tax bucket, and post-tax and inflation-adjusted returns are essentially non-existent.
Considering all these in mind, investing in mutual funds seems to be a great way to start saving for your child’s future. These funds help you build a diversified portfolio, allowing you to generate long-term returns.
Additionally, in today’s rising inflation and economic uncertainty, investing in avenues such as mutual funds that have the potential to beat inflation is increasingly important.
Advantages of Investing in Children’s Funds
Goal-Based Asset Allocation: Children’s plan allows parents to allot different funds based on goals like schooling, higher education, healthcare needs, marriage, etc. This makes the investment portfolio well-segregated. Additionally, these funds allow parents to choose a suitable asset allocation based on their risk appetite and budget.
Tax Benefits: Under Section 80C of the Income Tax Act, 1961, investments made in children’s plans up to Rs. 1,50,000 per year are eligible for tax exemption. Additionally, Section 10 (32) of the Income Tax Act 1961 allows for an annual exemption of Rs. 1,500 per child if the interest income exceeds Rs. 6,500 annually. Parents of children with disabilities can also qualify for extra tax benefits if they apply for children’s funds. Finally, the indexation benefit can result in lower taxes payable during redemption.
Lock-In Period: Most mutual funds for children have a lock-in period of 5-yrs with a possibility of increasing it till the child attains maturity, i.e. 18 yrs. A long-term lock-in period allows funds to accumulate and helps in meeting the goal.
Professional Management of the Fund: Professional fund managers are responsible for managing children’s mutual funds, which means that investors with limited market knowledge can still invest in the top children’s mutual funds. As a result, investors can expect better returns.
Limitations of Investing in Children’s Funds
Though the advantages of investing in children’s funds seem promising, there are a few limitations associated with them as well. Let’s have a quick look at them.
- Exit load: Mutual funds for children have a minimum lock-in period of 5 yrs. However, premature withdrawals are allowed as well, which comes with a high penalty. It is the exit load which can go up to 4%. Therefore, it is always wise to check the exit load details of the fund you are interested in.
- Volatility: Mutual funds are considered one of the highly volatile options. Well, it also depends on the asset allocation. For instance, equity mutual funds are more volatile than debt mutual funds. Hence, considering the volatility factor of the fund before investing in it sounds like a wise choice.
Factors to Consider Before Investing in Children’s Mutual Funds
Financial Goals and Investment Horizon
When investing in children’s mutual funds, it is essential to align the investment with your financial goals and the timeline for achieving them. For instance, if the primary goal is funding higher education, you should consider the years left until your child will need the funds. Equity-oriented funds may be more suitable for long-term goals due to their potential for higher returns, while debt-oriented funds might be preferred for shorter-term goals due to their stability.
Historical Performance and Consistency of Returns
Evaluating the historical performance of a mutual fund can provide insights into its potential future returns. Look for funds that have demonstrated consistent performance over multiple market cycles. This can indicate the fund’s ability to manage market volatility and deliver steady returns. However, past performance is not a guarantee of future results, so consider other factors as well.
Expense Ratio and Exit Load
The expense ratio represents the annual fee charged by the fund for managing your investment. Lower expense ratios can enhance your net returns over time. Additionally, be aware of the exit load, which is a fee charged for redeeming the fund before a specified period. Understanding these costs is crucial as they can significantly impact your overall returns.
Asset Allocation (Equity vs. Debt)
Children’s mutual funds can be equity-oriented, debt-oriented, or a balanced mix of both. Equity funds have the potential for higher returns but come with higher volatility. Debt funds, on the other hand, offer more stability with lower returns. Your choice should depend on your risk tolerance and investment horizon. A balanced approach may provide a good compromise between growth and stability.
Tax Implications
Understanding the tax implications of children’s mutual funds is crucial for effective financial planning. While investments in these funds may offer tax benefits under Section 80C, the returns are subject to taxation. Equity fund gains above ₹1 lakh per year are taxed at 10%, whereas debt fund gains are taxed at 20% with indexation benefits.
Fund Management and Reputation
The expertise and track record of the fund manager play a significant role in the performance of a mutual fund. Research the background of the fund management team and the reputation of the asset management company. Funds managed by experienced and reputable managers may be better positioned to navigate market challenges and capitalise on opportunities.
Taxability of Children’s Funds
Tax Benefits During Investment
Investments in children’s mutual funds qualify for tax deductions under Section 80C of the Income Tax Act, 1961, up to ₹1.5 lakhs annually. This deduction is available to parents or guardians investing in these funds, making it an attractive option for tax-saving purposes.
Tax on Returns
The tax treatment of returns from children’s mutual funds varies based on the type of fund:
- Equity-Oriented Funds: Long-term capital gains (LTCG) above ₹1 lakh in a financial year are taxed at 10%. There is no benefit of indexation for these gains. Short-term capital gains (STCG), on the other hand, are taxed at 15%.
- Debt-Oriented Funds: LTCG on debt funds are taxed at 20% with indexation benefits, which can significantly reduce the taxable amount by accounting for inflation. STCG on debt funds are taxed as per the investor’s income tax slab.
Tax on Dividends
Dividends received from mutual funds are subject to taxation based on the investor’s income tax slab. This is because dividends are added to the total income of the investor and taxed accordingly. Earlier, dividends were tax-free in the hands of investors, but this changed with the introduction of the dividend distribution tax (DDT) removal.
Who Should Invest in Children’s Funds?
- Investors who want to secure their child’s future or save up for their education, healthcare, and other essential needs
- Parents looking to save tax
- Investors who want to invest in the long-term
- Investors looking for the flexibility of a lock-in period
Are Children Mutual Funds Balanced Funds or Hybrid Funds?
Children’s gift funds or mutual funds invest in both equity and debts. Hence, they can be classified as balanced funds or hybrid funds.For hybrid funds, there are two classifications: hybrid equity-oriented mutual funds, which invest 60% or more in equity, and hybrid debt-oriented mutual funds, which invest 60% or more in debt products.
Children’s Mutual Funds Vs Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is one of the popular government schemes for a girl child. Let’s explore the differences and similarities between children’s mutual funds and Sukanya Samriddhi Yojana.
| Parameter | Children mutual funds | Sukanya Samriddhi Yojana |
| Eligibility | The account can be for a girl or boy child | The account must only be in the name of a girl child |
| Age limit | No minimum age requirement. However, the maximum age limit is 18 yrs. | The minimum age requirement is three months. The maximum age limit is 10 yrs. |
| Number of accounts | No restriction on the number of accounts that can be opened. | A maximum of two accounts can be opened for a family with two or more daughters. |
| Who manages the account | Parents or legal guardians | Parents or legal guardians till the girl child turns 18 yrs old. Post that, she can take control of the account. |
| Returns | No fixed interest rate as it depends on market fluctuations. | Fixed – currently, it is 7.6% per annum. |
| Investment limit | No limit | Rs. 1.5 lakh per year |
| Risk | Its dependency on market fluctuations makes it riskier than Sukanya Samriddhi Yojana. | Risk-free as sovereign guarantees back the scheme |
| Lock-in period | Usually, it is a minimum of 5 yrs or until the child turns 18 yrs, whichever is earlier. | 21 yrs from the date of opening the account |
| Premature withdrawal | Allowed, but exit load can increase up to 4%. | Allowed in case the child dies, is no longer a citizen of India, or is facing difficulties for survival like in the case of a parent or guardian. |
| Maintenance cost | The AMC charges a fee called expense ratio every year. | No maintenance cost. |
Conclusion
Children’s mutual funds are one of the best investment avenues when it comes to future security and tax savings. Tickertape Mutual Fund Screener helps you in deciding the best mutual fund for your portfolio. Additionally, with our new Mutual Fund Portfolio feature, you can fetch all your mutual funds holdings in one place, get their detailed overview, analyse your top gainers and losers, and download your data for more analysis. Read more about it here and explore the Portfolio now! Happy Investing!
FAQs About Mutual Funds for Children
What are the risks involved in children’s funds?
While children’s funds are aimed at long-term investment, they don’t guarantee returns and are susceptible to market conditions. The fluctuations and exposure in equity-linked funds make it a moderate to high risk. Hence, before investing, it is worthwhile to consider talking to an expert.
Can I gift a mutual fund to my child?
Yes, there are many mutual fund houses that offer children mutual funds, which you can gift to your children. They are also related to other requirements, such as schooling, higher education, marriage, healthcare, etc. The parents or guardians can invest in the mutual funds on behalf of their children and gift it to their children.
Is there any requirement for investing in children’s funds?
There are certain requirements for investing in children’s funds. The parents or guardians must provide the children’s proof of age, such as a Passport, Aadhar Card, Birth Certificate, etc., to invest in the mutual funds for kids. Proof of relationship with the child is also required. It can include a Passport or Birth Certificate with a mention of the parent’s/guardian’s name.
What is the lock-in period for children’s funds?
Mutual funds for children come with a mandatory lock-in period of 5 yrs or until the child becomes an adult. As a parent or guardian, you can invest in it for different purposes like marriage or child education.
What are the SBI child plans for 5 yrs?
SBI Life Insurance offers two types of child insurance plans: the Smart Scholar Plan and the Smart Champ Insurance Plan. The Smart Scholar Plan has an entry age for children from 0 to 17 years and for parents from 18 to 57 years (as the life assured). The policy term ranges from 8 to 25 years, with premium payment options including single premium and limited premium up to the policy period.
The Smart Champ Insurance Plan has an entry age for children from 0 to 13 years and for parents from 21 to 50 years (as the life assured). The policy term varies from 5 to 18 years, with premium payment options including a single premium and various periodicities such as monthly, quarterly, half-yearly, and yearly. The sum assured for both plans depends on the policy and premium payment terms, offering flexibility to suit individual preferences and needs.
As an insatiable reader and learner, I’ve spent the last two years exploring the world of finance. With my creative mind and curious spirit, I love making complex finance topics easy and fun for everyone to understand. Join me on my journey as we navigate the world of finance together!
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