What is Children's Fund?

Children's fund is a form of mutual fund with specific child-related goals and terms. These are a commonly availed investment option, acting as solution-oriented plans for the rising cost of education and other essential expenses.

Most mutual fund child plan invests in both equity and debt portfolios. Investors can also choose between higher debt and higher equity-based investment depending on their risk appetite and time horizon.

These mutual funds come with a minimum lock-in period of 5 years, whereas they can be extended until the child becomes an adult. Children's mutual funds prohibit an investor to withdraw the money until the policy matures, making it a suitable long-term investment option for most individuals. It also protects an investor against market volatility to some extent. Holding the investment despite market fluctuations ensures greater return than liquidising it whenever market dips.

What is the Purpose of a Children's Fund?

The primary purpose of a mutual fund for a child is to create a source of finances for the necessary expenditures like higher education, boarding, relocation, etc. Mutual fund for child comprises of a secured portfolio, allowing an investor to earn assured returns against their funds.

Parents can also select a flexible lock-in period, ranging from 5 years, until the child is age 18 years of age, according to their financial requirement. It acts as an alternative to long-term investment option, with tailor-made terms and conditions for a specific purpose.

These funds offer a decent balance of security and return thanks to their hybrid portfolio. A combination of debt and equity instruments ensures attractive returns with substantially reduced risks.

A high children's mutual fund India exit penalty reduces early redemption, allowing the funds to accumulate more interest over its tenor. Fund houses usually charge upwards of 4% penalty if an investor decides to liquidate children's fund before its minimum lock-in period (5 years.)

Taxability

Interest earned on these investment options is tax exempted. Mutual funds for children which are marketed as a gift are also tax exempted. Tax is levied only when the funds mature, and the amount is disbursed. The charges are also minimised to maximise the benefits of indexation.

Parents can also get avail exemption from their income under Section 80C if they invest in such funds. They can claim up to Rs. 1.5 Lakh deduction in this scenario.

They can also claim an annual exemption of Rs. 1,500 per child under Section 10 (32) of the Income Tax Act, 1961 if the interest income exceeds Rs. 6,500 annually.

Parents of children suffering from specified disabilities can benefit from additional tax exemptions if they apply for children's fund.

Who Should Invest in a Children's Fund?

Mutual fund for a child is an ideal financial instrument to create a substantial saving for one's children. It's tax-exempted nature, and assured return ensures accumulation of wealth, whereas heavy penalty against early withdrawals deters investors from liquidating the asset before its maturity.

It also offers customisable options for seasoned investors and helps build discipline amongst new long-term investors. Moreover, after the child attains the age of 18, the authorisation is handed over to him or her, providing better flexibility with the invested amount. He or she will only have to complete their KYC from the financial institution to hand over the authority.

This investment avenue is tailor-made for parents who want to create a substantial financial backup for their children to help them build their careers.

How do Children's Mutual Fund Compare with Other Savings Scheme like FD, PPF, Sukanya Samriddhi?

Let's take a look at Children's Mutual Funds in comparison to popular saving schemes like FD, PPF, Sukanya Samriddhi, etc.

Major Advantages

As a type of hybrid or balanced funds, these investment options present several benefits over ordinary short or long-term investments. Perhaps the most important advantage is the provision to set the funds as hybrid equity-oriented funds or hybrid debt-oriented funds.

An investor with higher risk appetite can opt for a hybrid equity-oriented fund, which invests a larger portion of its capital into equity schemes. It offers greater returns, associated with higher market risks.

An investor looking for assured returns can opt for hybrid debt-oriented fund, where a larger portion will be invested in debt-based products, offering moderate but guaranteed returns.

• These investment options encourage long-term investment and financial planning. Its substantial exit penalty ensures an investor does not liquidate the investment without maintaining it for a substantial duration.
• It eliminates chances of financial shortcomings and provides ample monetary assistance for education and other necessities.
• One can allot several funds to meet their unique financial goal. It allows individuals with a clear investment portfolio, segregate its segments for specific purposes. They can merge risky segments to reach their investment target easily.
• Categorisation of plans also allows planning for different phases of a child's needs, like schooling, higher education, home or other purchase plans, etc. It can be significantly beneficial for parents and help avoid straining the finances.

Investors opting for the debt-based scheme can enjoy tax exemption with a children's mutual fund India. They will not have to pay taxes for the duration of the investment, allowing them to save a significant amount of money over the fund's tenor.