What is a Children’s Gift Mutual Fund?
Children’s Gift Funds are mutual fund schemes that offer returns that would offer financial advantages to your children for needs such as meeting marriage expenses, future educational needs, etc. This creates long term capital appreciation and would fall under the category of Hybrid Funds or Balanced Mutual Funds. Gift Funds invest in a combination of Debt and Equity Instruments. An example of Debt Instrument is Fixed Income Securities and of Equities is shares.
These are classified further as “Hybrid-Debt Oriented” or “Hybrid-Equity Oriented” Funds, based on the level of exposure to Equities. If the equity exposure is more than 60% and the remaining is invested in debt assets, the mutual fund is treated as an Equity Oriented Balanced Fund. However, if debt exposure is more than 60% and the remaining is invested in equity assets, the mutual fund is treated as a Debt Oriented Balanced Fund.
Investments for your child’s long-term needs and plans
While bringing up your little one, you would want the best for him or her. You can invest a portion of your income in a gift mutual fund for your child to be financially prepared for numerous purposes. You can help your child achieve his or her aspirations with the help of these funds. These funds should be taken for long-term goals. 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.
Benefits of child mutual fund plans
- 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.
- A child can achieve his or her aspirations with the help of these fund plans without having to sacrifice them due to financial limitations.
- 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.
- Child mutual fund plans assist in allotting several funds for appropriate goals. Thus, your investment portfolio will have clear-cut segments for specific purposes. As a parent and as a responsible investor, you will find it easy to evaluate the performance of each segment. If there is an issue with any segment, you can take necessary steps to rectify it without any struggle. You will find it easier to monitor categories separately instead of monitoring every goal together.
- With child mutual fund plans, different goals for different phases of a child can be attained. For example, a child’s schooling, higher education, healthcare needs, wedding plans, home purchase plans, car purchase plans, etc. Hence, categorisation of funds in a plan is essential and beneficial.
- If your child mutual fund plan is a debt-based scheme, you can enjoy tax efficiency extensively. When you invest in your child’s name, you do not have to worry about paying taxes for several years. Hence, they are very good for long-term investments. Until you redeem a fund unit, you will not face any tax implication. Moreover, the indexation benefit will actually minimise your tax to almost nil when time goes by.
- You can enjoy customised or tailor-made fund schemes when you want to take a children’s gift mutual fund scheme.
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.
Key points to evaluate before buying Children’s Gift Mutual Funds
- Objective of the Fund – Find out the asset allocation strategy used in the fund and the investment strategy. Factors to be looked into are whether the funds are equity-oriented or debt-oriented. One should also evaluate the exposure to risk.
- Lock-in Period – Most gift mutual funds provide an elective lock-in facility. This enables the investor to ensure that the investment will be protected till the child becomes 18 years old.
- Expenses – It is important to note the overall expenses incurred, i.e., the expense ratio involved. The exit load plays a very important role – this may affect the overall returns accrued on the investment.
- Documentation – In order to invest in a gift mutual fund, the investor should submit some KYC documents. The KYC documents are details regarding the child and the investor, i.e., parent or guardian. While redeeming the fund and/ or at the time when the child attains the age of maturity, additional KYC documents have to be submitted.
- Returns – Before investing in a Children’s Gift Mutual Fund, it is necessary to compare this against other equity funds in order to evaluate the opportunity cost. This helps an investor in choosing the most appropriate mutual fund scheme that would generate high returns.
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.
Top Children’s Gift Mutual Funds in India
- ICICI Prudential Child Care
- HDFC Children’s Gift Fund
- TATA Young Citizens Fund
- Franklin’s Children’s Asset Plan (CAP)
- UTI Children's Career Plan (CCP)
- AXIS Children’s Gift Fund
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.