Children's Mutual Funds: What are these and are they suitable for meeting your child's future financial needs?

If you are on the hunt for suitable financial products for securing your child’s future, at least financially, here is a category of mutual funds that are specifically targeted at them. This category of mutual funds catering to children's finances is classified under solution-oriented schemes. So, before addressing whether this mutual fund should fit into your portfolio for meeting a child’s different life goals, take a look at the key salient features of this mutual fund category.

Importantly, Amar Ranu, Head of Investment Products & Insights at Anand Rathi Shares and Stock Brokers, on the investment instrument, said children funds are mostly managed as hybrid funds where the fund manager keeps a large portion (>65 per cent) in equity and equity-related securities and remaining in debt investments. 

However, the lock-in period discourages the parents from redeeming the fund in case of any financial stress in between. The emotional quotient deters investors from redeeming in the event of market volatility and encourages them to view these funds as long-term investments.

Features of Children's Fund

>> Children Fund has a lock-in period of a minimum of five years. This can be extended to a time until the child attains maturity. It offers parents the option to customise the offering by going in for a flexible lock-in period, starting from five years.

>> It is a long-term investment, as the mutual fund cannot be redeemed at an earlier date.

>> To an extent, it safeguards against market volatility.

>> Allocation of funds to both debt and equity offers a balanced mix, offering a higher return potential along with reduced risks.

Return

If we go by the return, some of the mutual funds from the category have offered an annualised return of up to 16.66 per cent on an annualised basis over a five-year term.

Expert take on children's mutual fund

“The performance of these funds, except one, is not in line with other diversified funds, and they underperformed relative to benchmarks and diversified peers. If investors are not impulsive and have patience with their investment actions, they should consider investing in pure equity funds, where, in case of any adversity, one has the option to move out if warranted. In the whole exercise, one should be mindful of asset allocation at the parent level to manage the risks,” Ranu noted.