Every parent wants to secure their child’s future financially. With living costs — especially educational expenses — on the rise, it’s important to start investing early. One of the most popular and effective tools for investing in your child’s future is mutual funds. You can invest in children’s mutual funds, also known as Children’s Gift Funds. These mutual fund schemes offer substantial returns, which can be invaluable for covering essential expenses such as your child’s education and other needs.
In this article, we will discuss what children’s mutual funds are, along with their features and advantages. Additionally, we will review the top three mutual fund plans for children.
What are child-dedicated mutual funds?
Child-dedicated mutual funds are a type of mutual fund with both equity (stocks) and debt (bonds) exposure. These funds offer the flexibility to switch between debt and equity based on market conditions and risk appetite. Upon maturity, these funds provide a lump sum to help cover educational expenses or other financial goals your child may have.
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“The advantage of child-dedicated mutual funds is that they come with a lock-in period or an age-based maturity feature which makes them a disciplined form of investment; ensuring that the corpus remains intact until it is truly needed,” says Aditya Agarwala, Co Founder, Invest4Edu – an education planning platform.
Some of the key features of these children-focused mutual funds are:
Balanced Asset Allocation: Most funds combine the growth potential of equities with the stability of debt instruments. This balance is instrumental in mitigating risks over long investment horizons.
Tax Benefits: Many of these funds come with tax benefits under Section 80C, making them an efficient choice from a tax planning perspective.
Customisable Withdrawals: Some schemes allow partial withdrawals after a lock-in period. It helps parents manage unforeseen financial needs without discontinuing the entire investment.
Regular Monitoring and Professional Management: These funds are managed by professionals ensuring the investments are in line with their goals.
“The time horizon plays a crucial role while deciding the right investment option. If you are a new parent or your child is still in primary education level, you can focus on growth and allocate a higher portion to equity. Equity funds tend to offer better returns in the long run, making them an attractive option for long-term goals such as your child’s higher education,” according to Aditya Agarwala.
On the other hand, if the time horizon is shorter—say, your child is already in high school—then it’s wise to choose funds with a higher debt allocation as they are less volatile and provide more stable returns, he added.
Top 3 Child-Dedicated Mutual Funds:
Based on the performance, here are top three child-dedicated mutual funds that invest4Edu recommends:
1. Tata Young Citizens Fund: This is an open-ended fund focusing on long-term growth. It is suitable for parents who wish to start investing early in their child’s higher education. With an AUM of 387 crore and Expense Ratio of 2.18% as on 31st August 2024, Tata Young Citizen Fund has a lock-in for at least 5 years or till the child attains age of majority (whichever is earlier). The fund has consistently performed well a Compound Annual Growth Rate (CAGR) of 16.60% over the past three years and 21.54% over the past five years.
2. SBI Magnum Children’s Benefit Fund – Savings Plan: An open-ended fund focused on long term capital appreciation; this fund has an AUM of nearly 2700 crore as on 321st August 2024. This plan can be considered high-risk as it invests predominantly in equity and equity related securities, but the returns are handsome. The three- and five-year CAGR are 27.27% and 45.79% respectively, and the Expense Ratio 0.85%.
3. ICICI Prudential Child Care Fund – Gift Plan: This plan is specifically structured to meet the needs of young parents and caters to a longer-term view. The three- and five-year CAGR figures are 19.80% and 19.96% respectively. It has an AUM of 1364 crores and an Expense Ratio of just 1.38%.
Mutual funds, especially the funds dedicated to children, are essential for today’s education planning. The cost of education is only going to go up and it is prudent to secure your child’s future needs with the right education planning and smart investments.
Disclaimer: Views and facts expressed above are those of the author. They do not reflect the views of Financial Express Digital. The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.