What are Children's Mutual Funds?

How do Children's Mutual Funds work?

These funds work by pooling money from investors (parents or guardians) and investing it in a diversified portfolio of stocks and bonds. The equity portion aims for capital appreciation over the long term, while the debt portion provides stability to the portfolio.

A professional fund manager handles the investment decisions, aiming to maximise returns based on the fund's objective. The lock-in period ensures the investment has enough time to grow and benefit from the power of compounding.

Should I Invest in Children's Mutual Funds?

Investing in children's mutual funds is a suitable option for parents or guardians who want a dedicated investment vehicle for their child's future. These funds are ideal for long-term goals that are at least 5-10 years away.

If you are looking for a disciplined way to save, benefit from market-linked growth, and have a clear financial goal for your child, these funds can be a valuable addition to your financial plan. Starting early allows you to build a substantial corpus with smaller investments.

How to Choose the Best Children's Mutual Fund for my Portfolio?

Choosing the right fund requires careful consideration of several factors. First, check the fund's asset allocation to see if its mix of equity and debt aligns with your risk appetite. A higher equity allocation means higher risk but also higher potential returns.

Next, review the fund's long-term performance (5-10 years) against its benchmark and peers. Also, consider the expense ratio, as a lower ratio means more of your returns stay in your pocket. Finally, understand the lock-in period and any exit load conditions.

What are the Benefits of Investing in a Children's Mutual Fund?

Goal-Oriented Investing

These funds are specifically designed for a child's future, which helps keep your investment focused. By earmarking funds for a specific purpose, you are less likely to withdraw the money for other, less critical expenses.

Disciplined Savings

The mandatory lock-in period, typically until the child reaches the age of majority, instils investment discipline. This prevents impulsive withdrawals during market volatility and ensures the investment stays on track to meet its long-term objective.

Power of Compounding

Starting an investment for a child early allows your money a longer time to grow. The returns earned on your investment are reinvested, generating further returns. This compounding effect can significantly multiply your initial investment over time.

Difference Between Children's Mutual Funds and Other Hybrid Funds

The primary difference lies in their objective and structure. While all hybrid funds invest in a mix of equity and debt, children's funds are specifically marketed and structured for long-term goals related to a child's future.

The most distinct feature of children's funds is the mandatory lock-in period. Regular hybrid funds, on the other hand, usually offer higher liquidity with no such compulsory lock-in, allowing investors to enter and exit more freely.

How much tax do I have to pay on Children's Mutual Funds?

The taxation of a children's fund depends on its portfolio's equity exposure. If the fund invests 65% or more in equity, it is taxed like an equity fund. Short-term capital gains (sold within one year) are taxed at 15%, while long-term gains (sold after one year) over ₹1 lakh are taxed at 10%.

If the equity exposure is less than 65%, it is taxed like a debt fund. Short-term capital gains (sold within three years) are added to your income and taxed at your slab rate. Long-term gains (sold after three years) are taxed at 20% with indexation benefits.

Children's Mutual Funds vs. Sukanya Samriddhi Yojana

Children's Funds are market-linked instruments with the potential for higher returns, but also carry market risk. Sukanya Samriddhi Yojana (SSY) is a government-backed scheme offering guaranteed, tax-free returns, but the returns are generally lower than what equity-oriented funds may offer.

SSY is only available for a girl child and has a longer lock-in period, whereas children's funds are available for any child. The choice depends on your risk appetite and return expectations. A combination of both can also be an effective strategy.

How is the AUM of Children's Mutual Funds Growing?

The Assets Under Management (AUM) in the children's fund category have shown steady growth, indicating rising investor confidence. Funds with consistent performance and a clear investment strategy are attracting significant inflows from parents planning for the long term.

For example, over the last six months, SBI Magnum Children's Benefit Fund- Investment Plan has seen the highest growth in AUM among its peers. This reflects strong investor interest in dedicated goal-based investment products.

Stocks Added by Best Children's Mutual Funds

Fund managers in the children's fund category actively adjust their portfolios to capture growth opportunities. They add stocks of companies with strong fundamentals and promising long-term prospects to drive portfolio performance.

Recently, stocks like Eternal Ltd and Power Grid Corporation of India Ltd have been popular additions across several children's mutual funds. This signals a positive outlook on these companies from fund managers in this category.

Top Exits from Children's Mutual Funds

Just as new stocks are added, fund managers also exit positions that no longer align with their investment strategy or outlook. This could be due to changing market conditions, sector-specific concerns, or simply to book profits.

In the last few months, some fund managers have reduced their holdings in stocks like Waaree Energies Ltd and CESC Ltd. These exits reflect a strategic reallocation of assets to manage risk and optimise portfolio returns.

Children's Funds Sector allocation

The sector allocation in children's funds provides insight into where fund managers see long-term growth potential. These funds typically maintain a diversified portfolio across various sectors to balance risk and reward.

Over the last six months, there has been an increased allocation towards sectors like Energy and Financial Services. In contrast, allocation has been reduced in sectors like Real Estate and Communication, reflecting a strategic shift based on market analysis.