Be it their child’s education or marriage, every parent dreams of creating an adequate corpus to fulfil such goals. While options such as Public Provident Fund, Fixed Deposits and Sukanya Samriddhi Yojana are popular for such needs, mutual funds too offer children’s funds, which are marketed as a good fit for such purposes. Children’s funds, along with retirement funds, are sub-categories of solution-oriented schemes. Here, we will look at the features of children‘s funds, the process of investing and a few other key aspects.
Portfolio Podcast | Children-specific Mutual Funds: Should you go for it?
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The children’s funds category has total assets under management (AUM) of about Rs 14,244 crore spread across 10 funds. About eight funds are aggressive hybrid mutual fund schemes with equity exposure of 65-99 per cent, the highest among them being ABSL Bal Bhavishya Yojana, UTI CCF Investment Plan and Tata Young Citizen Fund. The other two i.e. SBI Magnum Children’s Benefit Fund-Savings Plan and UTI CCF - Savings Plan-Scholarship are other hybrid schemes that carry higher debt exposure.
Eight out of ten funds in this category have been in existence for more than five years. The average CAGR return for the last five years has been about 9.31 per cent, the highest being HDFC Children’s Gift Fund and the lowest UTI CCF - Savings Plan-Scholarship. CAGR for the last ten years has been about 12.83 per cent, with the highest and lowest returns being delivered by HDFC Children’s Gift Fund and LIC MF Children’s Gift Fund.
How does it work
A children’s fund can be opened in the child’s name by his/ her parents or legal guardian. Since a minor (below 18 years of age) is unable to take his/ her own financial decisions, the parent or court appointed legal guardian acts as the account’s custodian. Unlike a bank account, a minor’s investments can’t be held in a joint account and the fund has to be necessarily held in the name of the minor only.
Children’s mutual funds come with a lock-in period, which means that one can’t redeem the investments before five years or till the child attains majority, whichever is earlier. However, early redemption (for e.g. unforeseen medical expenses relating to a disease) can be allowed under exceptional circumstances on a case-to-case basis. Else, if redeemed before the lock-in period, an exit load of as high as four per cent can be charged..
To begin the process of investing in a children’s fund, the child’s age proof i.e. birth certificate or passport copy, and proof of the guardian’s relationship with the child needs to be submitted.
Once the beneficiary completes 18 years of age, all standing instructions (for e.g. relating to SIP) shall be stopped and the guardian then can’t operate the account. When the minor turns major, a specific form (MAM) needs to be submitted.
The download link is https://tinyurl.com/minormajor1
Post form submission, KYC of the beneficiary takes place wherein he/ she needs to submit documents such as copy of PAN card, nomination form and cancelled cheque. Also, the change in status (minor to major) should be made in the bank account.
Taxation
While the child is a minor, any income coming from the mutual fund shall be added to the guardian’s income and taxed accordingly, in line with the existing provisions of the Income Tax Act.
As funds are being invested under the minor’s name, there is a small tax benefit attached to it. Parents 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.
Once the child turns 18 years old, any capital gains or income will be taxed in the hands of the beneficiary (child) only.
What you should do
Investing through children’s mutual funds enables financial discipline on account of the lock-in feature. However, apart from that, there doesn’t appear to be any significant advantage compared to other diversified or hybrid mutual funds.
Unlike other open-ended mutual fund schemes, this fund doesn’t face redemption pressure due to lock-in feature, which theoretically provides the fund manager more leeway to hold high-conviction bets. Practically though, this has not been the case as returns have not shown such trends.
The lock-in feature has a downside, too. If you find the scheme to be underperforming, you can’t switch to another children’s fund scheme.
If you’re a disciplined investor, an easier way to provide for children’s goals would be to invest in a suitable plain-vanilla equity-oriented mutual fund scheme through your minor child’s name for your kid’s long-term goals.