What is a Children’s Gift mutual fund?
While growing up your child, you want the best future for him. You can invest a part of your income in a gift mutual fund for your child so that it can be financially prepared for many purposes. You can help your child achieve his / her aspirations with the help of these funds. These funds should be taken towards long term goals. When investing in such a fund, one should ignore short-term market fluctuations and focus on the returns earned over a few years.
Children’s Gift Funds are a scheme of mutual funds that offer returns that provide financial benefits to your children for the needs of wedding expenses, future educational needs, etc. It produces returns in long term capital and falls under the category of hybrid funds or balanced mutual funds. Gift funds invest in a combination of debt and equity investment. An example of debt investment is fixed income securities such as bonds and equities.
These are further classified as “hybrid-debt oriented” or “hybrid-equity oriented” funds based on their level of equity exposure. If the equity exposure is more than 60% and the rest is invested in fixed income, then the mutual fund is treated as an equity oriented balanced fund. However, if the debt is more than 60% and the rest is invested in equity securities, then this mutual fund is considered as debt oriented balanced fund.
Key POINTS to evaluate before investing in Children’s Gift Fund:
Fund purpose – Find out the asset allocation strategy and investment strategy used in the fund. The factors to be noted are whether the funds are equity-oriented or debt-oriented. Risk assessment should also be done.
Lock-in period – Most children’s gift funds provide an optional lock-in facility. This enables the investor to ensure that the investment will be protected until the child turns 18.
Expenses – It is important to pay attention to the total expenses incurred, ie, the expense ratio. Exit load plays a very important role – it can affect the total return earned on investment.
Documentation – To invest in a Children’s Gift Fund, the investor must submit some KYC documents. KYC documents are details about the child and the investor, that is, a parent or guardian. Additional KYC documents have to be submitted to redeem the fund and / or at the time the child attains maturity age.
Return – Before investing in a children’s gift mutual fund, it is necessary to compare it against other equity funds to evaluate the opportunity cost. It helps an investor to choose the most suitable mutual fund scheme which generates higher returns.
Exit load in Children’s Gift Fund – When you plan to have a mutual fund for your children, you have to pay attention to the exit load associated with it. Most mutual fund houses want to retain parents as their customers for a long time. Therefore, when they are interested in performing an initial redemption, they incur a high exit load or penalty. But there have been changes in this, such as there is no load in the HDFC Children’s Gift Fund after the 5-year lock-in period.
The conclusion
A major advantage of this fund is that third parties can also invest in these schemes. Grandparents may also invest in the name of their grandchildren.
At the time of redemption, the money is only sent to the bank account of the beneficiary child. You need to give a promise that you will keep updating the bank details of the beneficiary child, once he attains adult age or once his account is opened, if he does not currently have a bank account. |
Equity-oriented hybrid schemes also invest in similar ways and provide excellent returns, but they fail to connect emotionally. There are many people who have stopped all their investments in difficult times, but they do not stop their investments in child specific schemes.
The point is this: You definitely do not need a specially designed child plan to invest for your child’s college education. Even a plain equity-oriented hybrid fund will work for you. Provided you have the discipline to stick to your investment plan. But when you invest through a child mutual fund scheme, the investment is automatically directed towards a particular goal and the chances of success of that investment increase.
