Children’s Gift Mutual Funds

Top Children's Gift Mutual Funds in India

The following are the best child plan mutual funds in 2024:

1. HDFC Children's Gift Fund
2. ICICI Prudential Child Care
3. AXIS Children's Gift Fund
4. LIC MF Childrens Gift Fund
5. TATA Young Citizens Fund
6. Franklin's Children's Asset Plan (CAP)
7. UTI Children's Career Plan (CCP)

Benefits of Child Mutual Fund Plans

1. Children's gift mutual funds encourage individuals to invest funds for long-term growth. The returns derived from such long-term plans will help their children when they grow up.
2. A child can achieve his or her aspirations with the help of these fund plans without having to sacrifice them due to financial limitations.
3. When a child mutual fund plan is taken, the investor would not redeem or withdraw funds without thinking properly. It discourages investors from exiting suddenly without sticking to it for a substantial duration.
4. Child mutual fund plans assist in allotting several funds for appropriate goals. Thus, your investment portfolio will have clear-cut segments for specific purposes.
   1. As a parent and as a responsible investor, you will find it easy to evaluate the performance of each segment.
   2. If there is an issue with any segment, you can take necessary steps to rectify it without any struggle.
   3. You will find it easier to monitor categories separately instead of monitoring every goal together.
5. With child mutual fund plans, different goals for different phases of a child can be attained.
   1. For example, a child's schooling, higher education, healthcare needs, wedding plans, home purchase plans, car purchase plans, etc.
   2. Hence, categorisation of funds in a plan is essential and beneficial.
6. If your child mutual fund plan is a debt-based scheme, you can enjoy tax efficiency extensively.
   1. When you invest in your child's name, you do not have to worry about paying taxes for several years.
   2. Hence, they are very good for long-term investments.
   3. Until you redeem a fund unit, you will not face any tax implication.
   4. Moreover, the indexation benefit will actually minimise your tax to almost nil when time goes by.
7. You can enjoy customised or tailor-made fund schemes when you want to take a children's gift mutual fund scheme.

Why Consider Investing in Children's Gift Fund

A children's fund is designed to safeguard a child's future by establishing a reliable financial resource for upcoming expenses such as education, marriage, and relocation. Here are some important reasons to contemplate investing in a children's fund:

1. Assured Returns: These funds offer a guarantee of returns on your investments.
2. Flexible Lock-in Period: You have the option to choose a flexible lock-in period, ranging from five years to when your child reaches 18 years of age.
3. Customised Terms and Conditions: Children's funds offer customisable terms and conditions that would suit your specific needs.
4. Balanced Portfolio: These funds strike a balance between return and risk due to their hybrid portfolio, which includes a mix of debt investments and equity investments.
5. Risk Mitigation: The combination of debt and equity instruments ensures attractive returns while managing risks effectively.
6. Penalty Risk: By refraining from early withdrawals, you can take advantage of penalty reductions and earn higher interest over a more extended period.
7. Minimum Lock-in Period: These funds typically have a minimum lock-in period of five years, and Asset Management Companies (AMCs) often impose a penalty of 4% or more if you redeem units before this period concludes.

Taxation

Interest earned from these investment options is eligible for tax exemption. Similarly, mutual funds designed for children and marketed as gifts also enjoy tax exemption. Taxation is only applied when the funds mature, and the disbursed amount becomes taxable. Charges are kept at a minimum to maximise the advantages of indexation.

Parents can additionally benefit from income tax deductions under Section 80C if they invest in such funds. These parents are eligible to claim a deduction of up to Rs. 1.5 lakh in this context.

Furthermore, they can claim Rs. 1,500 of annual exemption per child under Section 10 (32) of the Income Tax Act, 1961, if the interest income surpasses Rs. 6,500 per year.

Parents with children suffering from specified disabilities may also be eligible for additional tax exemptions when they opt for children's funds.

Who Should Consider Investing in Children's Gift Fund

A children's mutual fund represents an excellent financial tool for those looking to build a significant savings fund for their children. Its tax-exempt status and guaranteed returns facilitate wealth accumulation, while the substantial penalty for early withdrawals discourages investors from liquidating the investment prematurely.

The flexibility of these funds caters to both experienced investors, allowing for customisation, and instils financial discipline among newcomers to long-term investments.

Furthermore, once the child reaches the age of 18 years, the authorisation is transferred to them, granting greater flexibility in managing the invested funds. To assume control, they typically need to complete their Know Your Customer (KYC) requirements with the financial institution.

This investment avenue is specifically designed for parents who aim to establish a substantial financial safety net for their children, facilitating their educational and career aspirations.

Eligibility to Investment in Children's Gift Fund

1. Investments in these funds are permissible exclusively in the name of the minor child.
2. Parents or legal guardians have the authorisation to invest in these funds on behalf of their children.

Considerations Before Investing in Children's Gift Funds

Before making an investment in children's gift fund schemes, it's crucial to keep the following points in mind:

1. Fund Objective: Examine the fund's objectives, including its investment strategy and asset allocation. If you prefer a low-risk approach, consider investing in debt-oriented funds.
2. Exit Load and Expense Ratio: Be mindful of the costs associated with mutual fund investments. The expense ratio is an annual fee, while exit loads are incurred when redeeming fund units.
3. Lock-in Period: Understand your investment horizon before selecting a fund. Children's gift funds typically have a lock-in period until the child reaches 18 years of age. If you need a short-term investment, these funds may not be suitable.
4. Documentation: To begin investing in children's gift funds, you will need to provide official documents verifying your parental or legal guardian status. During the redemption process, additional documents related to your child may be required.
5. Rate of Return: Consider your risk tolerance and return expectations. If you are seeking higher returns, hybrid equity-oriented funds may be an option, but they come with higher risks. Alternatively, if you prefer moderate returns and lower risk, you can consider hybrid debt-oriented funds.

How Children's Gift Funds are Balanced Funds or Hybrid Funds

Children's gift funds can be classified as hybrid funds or balanced funds. These gift funds for children will be invested in both equity shares and debt instruments. Hybrid funds can be broadly divided into hybrid-equity oriented funds and hybrid-debt oriented funds depending on the exposure of the schemes to equities.

Hybrid Equity-oriented Funds

When most of the assets of your fund scheme are invested in equity, your scheme will be considered as a hybrid equity-oriented scheme. In such a scheme, your fund's assets will have more exposure towards equity than towards debt products.

Hybrid Debt-oriented Funds

When your fund's assets are invested more in debt products, your scheme will be treated as a hybrid debt-oriented scheme. In this fund, your funds will have more exposure towards debt products when compared to equity products.

Investments for your Child's Long-term Needs and Plans

1. While bringing up your little one, you would want the best for him or her.
2. You can invest a portion of your income in a gift mutual fund for your child to be financially prepared for numerous purposes.
3. You can help your child achieve his or her aspirations with the help of these funds.
4. These funds should be taken for long-term goals.
5. While investing in such a fund, one should ignore short-term market fluctuations and focus on the returns that will be earned in a few years.

Exit Load related to Children's Mutual Funds

When you plan to take a mutual fund for your children, you need to take note of the exit load associated with it. Most mutual fund houses want to retain parents as their customers for a long period. Hence, they charge high exit loads or penalties when one is interested in making an early redemption.

Earlier, there were entry loads for most mutual funds. Once the entry load was banned, fund houses typically charge around 1% as exit load when an investor wants to redeem the fund before completing 1 year. When you plan to exit a child mutual fund plan, you will have to be prepared to pay an exit load of up to 4%. Moreover, the minimum period for an investor to stay with a child mutual fund plan can go up to 5 years. There are some plans that charge an exit load even if one quits a mutual fund scheme after 7 years.

In one way, this is helpful to investors as they are encouraged to make long-term investments and in turn, these investors will be able to witness an extensive growth of their funds, which can be used for numerous purposes.

Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

GST rate of 18% applicable for all financial services effective July 1, 2017.