You may be among many people whose long-term financial goals include their children’s higher education and marriage. Neither of these undertakings are cheap. 

 

Thankfully, there are ways to be financially prepared and support your children, and one among these is via Children-oriented Mutual Funds. Depending on the specific financial goal for your child, you can choose between:

  • Children’s Gift Funds

  • Children’s Asset Funds

  • Children’s Career Funds

 

Read on to know more about investment in mutual funds for minors, their benefits, and the top mutual fund plans for children. 

Mutual Funds Plans for Children

A mutual fund for children is a type of fund that allows parents or guardians of minor children to invest in their name. These are generally hybrid funds with exposure to both equity and debt securities.

 

These funds come with a lock-in period of 5 years, after which you can withdraw the deposited corpus along with the capital gains. The investment horizon of these funds can also be extended till your child reaches 18 years of age.

 

Once your child becomes 18 years old, these mutual fund units can be transmitted to them. They can then take control of this investment.

Benefits of Investing in Mutual Funds For Children

The following are some of the perks that you can enjoy with an investment in mutual funds for minors:

  • Long-Term Growth: These mutual funds offer higher returns in the long run and, thus, are suitable for your children’s financial needs when they grow up

  • Secures Your Child’s Future: The returns from these funds ensure that your children do not experience any financial limitations in completing their higher education

  • Flexibility in Investment: These schemes also allow you to track the performance of different segments and make adjustments to achieve higher capital gains

  • Tax Benefits: If you invest in any child plan, you can avail of tax exemptions under Sections 80C and 10 (32) of the Income Tax Act of 1961

Features of Children's Mutual Funds

Here are the highlighting features of the children's mutual funds.

Lock-in Period

There is a lock-in period of 5 years, and you can extend it until your child turns 18

Type of Funds

You can choose from different types, such as hybrid, debt, or equity

High Exit Load

The fund house can charge up to 4% or more as exit load if you withdraw the funds before the lock-in period ends

Documentation

To invest in children’s mutual fund, you must provide basic documents as well as proof of relation and age

Taxability of Children's Mutual Funds

In addition to securing your children’s future, the mutual fund scheme is also subject to some tax benefits and implications. These are as follows:

  • Tax deduction up to ₹1.5 Lakhs u/s 80C

  • Annual exemption of ₹1,500 per child u/s 10(32) if yearly interest exceeds ₹6,500

  • Maturity gains are taxable as per the income tax law

  • All equity gains over ₹1 Lakh in a fiscal year are taxable at a 10% rate

 

All capital gains on debt funds are taxable at 20%

Things to Consider When Choosing Child Plans in Mutual Funds

When choosing a mutual fund for a child, take the following factors into account:

  • Investment Duration: These funds have a lock-in period of 5 years, and you will have to pay an exit load if you withdraw early  

  • Documents Required: The AMC will require you to submit proof of your child’s age and proof of your relationship with the child when starting the investment

  • Returns: In order to gain maximum capital gains, it is essential that you compare multiple funds and analyse their performance before finalising one

  • Risk Tolerance: It is also essential for you to assess your risk appetite and choose a fund that matches your needs

  • Asset Allocation: You will also need to choose how much money you would like to allocate to different asset classes (equity and debt securities)

 

Risks involved in Children's Mutual Funds

The risk and reward of mutual fund investment are subject to asset allocation and market fluctuation. While hybrid and debt funds have lower risks than complete equity investments, there is no guarantee of returns in either.

 

However, investing for the long term and carefully choosing the type of fund can help mitigate the risks. As such, your investment in a children’s mutual fund should depend on your risk appetite and investment goals.

 

A Children’s Mutual Fund scheme may be the right investment to create a substantial savings fund for your child’s higher education or marriage. It offers assured returns while being tax-free in nature, making it an ideal choice for parents. 

 

They also come with a fixed lock-in period, which makes them suitable for you if you are a new investor. However, equity-based funds may generate higher returns if you understand market volatility. So, plan your investment in mutual funds for minors carefully.

FAQs on Children’s Mutual Funds

How to invest in Children’s Mutual Funds?

Any parent can invest in a children’s mutual fund in their child’s name through a fund house or AMC. You will need to submit documentation as proof of your child’s age and proof of your relation with the child to avail of the benefits of this mutual fund scheme.

What is the lock-in period for investing in Children’s Mutual Funds?

Children’s mutual funds come with a lock-in period of 5 years. Some AMCs allow you to withdraw the corpus before the end of the maturity period. However, they may charge you an exit load, ranging between 2% to 4% of the Net Asset Value (NAV).

What is applicable taxation on Children’s Mutual Funds?

Investments made in the children’s mutual fund qualify for tax exemption of up to ₹1.5 Lakhs in a financial year under Section 80C. Children’s Gift Funds, a type of children’s mutual fund, are also exempt from taxation.

 

If the interest earned from a child plan in a mutual fund exceeds ₹6,500, you can also claim tax deductions of up to ₹1,500 per child annually under Section 10 (32). 

 

For parents of children with special abilities, additional tax exemptions are available on child plans and mutual funds. However, the maturity gains that you get on these mutual funds are taxable as per your applicable slab rate.

What are the risks involved in investing in mutual funds for a child?

Children’s mutual funds are a hybrid of equity and debt securities that generally offer good returns in the long run. However, their exposure to the equity market makes them a moderate-to-high-risk investment.

 

The returns on these funds may generally be higher than other traditional investment avenues. However, being a market-linked scheme, these funds are susceptible to market volatility and do not guarantee returns.

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