It is really hard to plan and invest in your child’s future. To help, mutual fund companies have launched some specialised funds so that you can invest in them. But is it the best for your child’s future? Let’s find out.
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Buckle up, here we go!
For Indians, one of the key life goals, other than retirement planning and buying a house, is to help secure our children’s future. The priority is to make sure we have enough funds to fulfil our child’s educational needs.
Also, there are other expenses like their wedding, jumpstarting their careers, etc.
Mutual fund companies have been marketing their child-dedicated plans as a one-stop solution.
What are Children’s mutual fund plans?
Children’s plans are open-ended mutual funds. That means you can invest in them anytime. There is no time restriction like we have for Sukanya Samriddhi Yojana.
Similar to other schemes, children’s mutual fund plan has a lock-in period too. But it is just for 5 years or until the child becomes a major.
Some companies also offer no lock-in option, but to encourage long-term investments, they impose stiff penalties, or exit loads, for early withdrawals. This exit load can go up to 4% if we withdraw before five years.
These funds were created to be suitable for child-specific goals like meeting their educational expenses, wedding, or other essential expenses.
Just like normal mutual funds, they give you some freedom, like there is no maximum investment limit, or you can invest how many times you want, etc.
On the taxation front, since most of these schemes are equity funds and have a lock-in period of five years, long-term capital gains (holding period of above one year) over ₹1 lakh are taxed at 10%.
How do they invest the funds?
We have analysed the top children’s mutual fund schemes provided by the mutual fund companies. The investment style of all these funds is hybrid. Some are aggressive, and others are balanced.
For starters, they invest the funds in equity and debt simultaneously in hybrid funds. It is aggressive if they invest around 65-80% of the fund in equity.
What is the expense ratio of children’s mutual fund schemes?
Trust me, when I say I skipped a heartbeat when I saw they were charging an expense ratio above 2% on regular funds. Even for direct funds, they were charging around 1.3%.
We know they are not index/passive funds. They charge a high expense ratio because they are actively managed funds. But if you look at the expense ratio of actively managed hybrid funds in general, they are comparatively low.
The performance of general hybrid funds and children’s plans doesn’t have any drastic differences. So, are they charging high only because these plans have children in the name and parents can be easily fooled? You be the judge.
Should you invest in a child-dedicated mutual fund plan?
While equity is the best investment for your long-term goals, starting directly with a hybrid plan is not efficient.
Let’s say you are investing in your child’s high education. You need the money after 15 years.
You will get the best returns if you start by investing 100% in equity for the first 10-12 years. And after that, you can start allocating some portion of your corpus to debt funds. Aim to achieve 100% of your corpus in the debt fund as you reach the goal.
If you are not comfortable with risk, you can start with hybrid funds. But avoid these marketing gimmicked children’s funds. Their performance hasn’t been good, charge a high expense ratio, and you won’t receive any other benefits.
As we always say, you don’t need an expert to manage your money. Invest some time in learning, and just with the basics, you will be able to handle your money better.
Need help finding the best mutual fund by yourself, check out our mutual fund series.
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