As a loving parent you would always want the very best for your child. Investing for your child’s future is one of the most critical financial objectives as a responsible caring parent. Your child’s education is a key financial goal that is important to ensuring a good quality life for your child.
Investing in the right avenues over a decade or two compounds your money multiple times. Equity Mutual funds offer the best means for getting higher returns that beats inflation over the long term. When you invest for ten years or more, you can expect gains that beat the inflation rate as well as returns from fixed income options in these mutual funds. Markets are very cyclical in nature so be prepared for ups and downs in your investment value along the way.
Children’s gift fund is an open ended fund for investments for children having a lock-in period of at least 5 years or till the child attains the age of majority, whichever is earlier. To start investing in children’s gift funds, you are required to submit official documents, which prove that you are a parent or a legal guardian of the child.
The primary purpose of a mutual fund for your child is to create a source of savings for necessary expenditures like higher education, boarding, marriage, etc. In these mutual funds 65-80% of the total assets of the scheme will be invested in equities and equity related instruments and the balance will be invested in debt and money market instruments. The scheme aims to generate returns over the long term and aims to keep risk under control via the debt instruments in the scheme.
If you are looking for the best returns on these funds, then you should invest in hybrid equity-oriented funds, remember that higher returns come with higher risks. If you are not ready to bear any risks and are ready to settle with average returns over a duration of 5 years, then invest in a hybrid debt oriented fund. Advisors may recommend that you always hold on to equity oriented fund investments despite market volatility to ensure better returns over time instead of liquidating the fund whenever the market drops or in the middle of a bear market. Once you get closer to the goals for which this children’s gift fund was purchased you should turn conservative and move a larger portion of this fund into debt to avoid future market volatility.
Investments in these funds can be made only in the name of the minor child. Parents or legal guardians are allowed to invest in these funds on behalf of their child. Like all other investments in mutual funds, there is no assurance that the investment objective of this mutual fund scheme will be realized.
As a parent if you start investing in these funds early, you may want to start SIPs in at least two of these children gift funds to distribute the risks to reach your children’s goal. If you have a higher risk appetite and/or have 10 years or more, you can select a larger equity allocation in these funds. As a part of your overall family’s investment strategy you may also want to buy yourself a term cover so that in the unfortunate event of your demise, your loved ones would still receive a sufficient sum assured to meet your family’s and child’s expenses.
Mutual funds for children which are marketed as a gift are tax exempted. Tax is levied only when these funds mature, and the sum is paid back. Since investments in these funds are for a longer duration, taxes are minimised due to the benefits of indexation. You can also avail an exemption from income tax under Section 80C, by investing in gift mutual funds and can claim up to Rs 1.5 Lakh deductions.
The information, analysis and opinions expressed herein are for education purposes only and are not intended to provide specific advice or recommendations. This material is not an offer, solicitation or recommendation to purchase any financial products or services. Always remember that all investments carry some level of risk, including the potential loss of principal invested.