Saving for your kid’s higher education is more important today than it was decades ago because of the spiraling education costs. The cost of education in India is increasing by 10%-12% every year. Even if you are assuming that the inflation is at 7%, any college fee that costs you Rs. 5 lakhs today will be Rs. 10.5 lakhs in 2031.
Earlier, investors in the 1980s had chit funds. People used to invest in specific chit funds for their children’s higher education. Then, people opened bank deposits in their children’s names to save for their marriage and higher education. Now, there are many mutual funds that are available that help you save for your child’s future.
Children’s gift mutual funds
These are a category of mutual funds that are specifically launched to help investors build a corpus for their child’s future. Any parent, grandparent or any other guardian of the child can gift units of these funds to any child who is under 18 years of age. The units of the fund will be in the name of the child. If a grandparent is investing for the child, the grandparent will be the donor while the child will own the investments and parents will be the stated guardian.
What kind of mutual funds are these?
Children’s mutual funds are mostly hybrid or balanced mutual funds. So, they will be categorized as hybrid equity-oriented funds or hybrid debt-oriented funds depending on their exposure to equity or debt. If the mutual fund invests more than 60% in equities, it will be considered a hybrid equity-oriented fund and if the debt exposure of the fund is higher than 60%, then the mutual fund will be a debt oriented mutual fund.
|Top Children’s Funds returns|
|I year||2 Year||3 Year||5 Year|
|AXIS Children’s Gift Fund – (G)||466.81||2.96||10.15||5.88||0.00|
|Aditya Birla SL Bal Bhavishya Yojna WP – Reg (G)||290.52||3.26||0.00||0.00||0.00|
|HDFC Children’s Gift Fund-Invt Plan (G)||3386.51||6.34||8.02||5.20||8.83|
|ICICI Pru Child Care Fund-Gift Plan||618.40||0.89||4.21||3.72||6.49|
|LIC MF Children’s Gift Fund||11.60||2.25||9.01||2.43||4.76|
|SBI Magnum Children Benefit Fund||66.14||5.58||4.78||4.59||9.49|
|Tata Young Citizens Fund (After 7 Years)||181.82||6.54||8.12||1.09||4.82|
|UTI-CCF Investment Plan – (G)||330.09||5.62||5.88||1.69||7.27|
|UTI-CCF Savings Plan – (Scholarship)||3535.54||5.73||4.02||2.68||5.77|
|Nifty 500 TRI||3.91||7.42||4.14||8.45|
|S&P BSE 200 TRI||3.94||8.23||5.37||8.93|
Who can invest in these funds?
Only parents or legal guardians can invest in children’s mutual funds on behalf of the child. Investments can be made only in the name of the minor child.
How can you invest in these funds?
You can either make a one-time investment or you can use the Systematic Investment Plan (SIP) route to invest in Children’s mutual funds.
Are the returns from these funds higher than other funds?
Children’s mutual funds can be compared to hybrid equity funds. The average 5-year return for this category of funds is 9% while some of the best children’s mutual funds such as HDFC Children’s Gift Fund have provided a return of 8.7% in the past 5 years.
Note that there are funds such as UTI Children’s Career Fund that have given returns of less than 5.7%. So, the returns aren’t more than that of hybrid equity funds. However, the returns of Children’s mutual funds will be lower than that of equity funds.
Should you invest in Children’s mutual funds?
The only advantage with these funds is the name. Since the name has ‘children’ in it, investors might sentimentally not use the fund for purposes other than for the child’s education. The investment is earmarked only for your children’s future. So, you will automatically continue investing in the fund.
However, these funds are not the only funds you should consider when saving for your child’s future. Since these funds don’t do anything special to help you save for your child’s future, it is better to look at all categories of funds to choose investments for your child.
How to invest for your child’s future?
If you are planning to invest for your child’s future, you can create a separate portfolio for each investment that you make. Ideally, you should start saving when they are less than five years. This will help you to save more and manage the funds for each of your children. To make sure that all your children’s goals are included in your savings plan, you could create a portfolio for short, medium, and long-term goals. This way you can invest in the right funds for each of the goals.
Consider large or mid cap equity funds for long-term investment goals. Note that SIPs are not best suited for short term goals. When the goal is seven or more years, you can consider investing in mutual funds using SIP. For other goals such as your child’s primary school education, your investment strategies shouldn’t include equity funds.
If you know that you will need the funds for your children in less than 3 years, it is good to look at ultra-short term and short-term funds. You must strive to invest regularly. The most important point is to refrain from using children’s investments for needs other than education.