Children’s Fund
A Children’s Fund, commonly referred to as a Children’s Mutual Fund, is a specialized investment plan designed to help parents and guardians save systematically for a child’s future financial needs such as education, marriage, or other important milestones. These funds are solution-oriented with a focus on long-term financial goals.
According to SEBI (Securities and Exchange Board of India), a Children’s Fund is defined as a solution-oriented mutual fund scheme designed for investment specifically for children. It is an open-ended fund with a mandatory lock-in period of at least 5 years or until the child attains the age of majority (whichever is earlier). These funds are created to meet long-term financial goals related to a child’s future expenses, such as education or marriage.
Who are suitable to invest in Children’s Fund:
Children’s Funds are suitable for a variety of investors who are focused on securing the financial future of a child. Typically, the following are the key groups suitable to invest:
- Parents of Children: Parents, especially of newborns or young children, are the primary investors. Starting early provides a longer investment horizon, allowing the corpus to benefit more from compounding.
- Legal Guardians: Guardians responsible for a minor’s upbringing and education can invest on behalf of the child.
- Grandparents and Relatives: Family members who want to gift a meaningful and long-term financial asset to a child.
- Anyone Responsible for a Child’s Financial Security: Anyone invested in the well-being and future education or marriage expenses of a child can use these funds as a disciplined saving vehicle.
Additional Points:
- Minors themselves cannot directly invest. Investment in the child’s name must be done by parents or legal guardians who act as custodians until the child attains majority (18 years).
- The child is the sole account holder, but the parent/guardian manages the investment until the child becomes an adult.
- Once the child reaches 18, the account status must be updated from minor to major to continue transactions.
Features of Children’s Fund:
- Solution-Oriented Scheme: Designed specifically to meet long-term financial goals for a minor child, such as education, marriage, or other major life events.
- Lock-in Period: Mandatory lock-in of at least 5 years or until the child attains the age of majority (usually 18 years), whichever is earlier. This lock-in promotes disciplined investing.
- Open-Ended Fund: Although it is open-ended, redemptions are restricted during the lock-in period except for certain situations like the death of the parent or guardian.
- Single Unit Holder: The child is the sole unit holder, and joint holding is not permitted. The parent or legal guardian acts as a custodian until the child attains majority.
- Investment in Equity and Debt: The fund typically invests in a diversified portfolio of equity and debt instruments to balance growth and stability.
- Investment by Parent/Guardian: Investments can only be made by the natural parents, legal guardians, or donors on behalf of the child.
- Payment Sources: Payments can be made from the minor’s bank account or a joint account with the guardian or from the guardian’s account.
- Transfer of Ownership at Majority: When the child attains 18 years, the folio is frozen until the status is changed from minor to major, requiring submission of KYC and bank details by the child to continue transactions.
- Nomination Facility: The parent/guardian can nominate an alternate minor child at the time of application or subsequently.
- Transparency and Regulation: The fund operates under SEBI’s regulatory framework, ensuring investor protection, transparency, and fairness.
- Premature Redemption: Redemption before maturity is generally not allowed except in exceptional cases, such as the death of the guardian.
How does Children’s Fund Work:
- Investment by Parent/Guardian: The investment is made in the child’s name but managed by the parent or legal guardian until the child attains majority (18 years). The investment can be done through a lump sum or systematic investment plan (SIP).
- Lock-In Period: The fund has a mandatory lock-in period of at least 5 years or until the child reaches adulthood (whichever is earlier). This lock-in period encourages disciplined long-term investing and prevents premature withdrawal, helping grow a substantial corpus.
- Diversified Portfolio: The fund invests in a mix of equity and debt instruments depending on the fund’s strategy. Equity investments provide growth potential, while debt instruments offer stability and income.
- Growth of Investment: Over the investment horizon, the corpus grows through capital appreciation, dividend income, and interest earnings. The power of compounding helps the corpus increase significantly over time.
- Redemption Post Lock-in or Majority: Once the lock-in period is over or the child attains majority age, the parent or the child (now an adult) can redeem the investments as needed for education or other expenses.
- Transfer of Ownership: Upon adulthood, the child becomes the legal owner of the mutual fund units. The folio status needs to be updated from minor to major by submitting necessary KYC documents.
- Tax Benefits: These funds may also provide tax benefits under applicable laws, helping enhance the overall returns.
- Professional Management: The fund is managed by professional fund managers who decide the portfolio mix, aiming to maximize returns while managing risk according to stipulated guidelines.
