4 Must Know Things About Mutual Fund Children's Plans

  Author: Kundan Kishore

Like life insurance companies, some mutual funds also provide children’s plans. These mutual fund plans have the aim to help investors save for their children’s future needs such as higher education. An investor wanting to consider them for investment needs to know about the following four features that are specific to such plans.

Multiple variants Children’s plans from mutual funds come in multiple variants in terms of their asset allocation. You can choose from an equity-oriented fund, debt-oriented fund, and a hybrid fund, which invests in both equity and debt.

Lock-in Some children’s plans come with a lock-in period. That helps you maintain an investment discipline for your child’s financial goal. Remember, it is when you stay invested for the long-term and allow your money to grow that you can save ample amounts for your child’s future needs like higher education.

Higher exit load To help parents stay invested, these plans have a hefty exit load ranging from 1-5% depending on the investment tenure. This amount of money you need to pay for moving out early.

Age limit Some of the children’s plans from mutual funds come with a barrier on age of entry. This means you cannot invest in schemes after the child has crossed the age.

While it is not necessary for you to buy a children’s plan to save for your children yet it such investments are often useful to inculcate the investment discipline for such major needs. There is another important point worth pointing out.

At FundooMoney, we recommend that you opt for the equity-oriented variants or hybrid variants of these plans that invest at least 65% of their money in equities. This will classify your investment as an equity fund and consequently, any capital gains after staying invested for a year will be tax free.  For other variants, you will need to pay 20% long term capital gains tax on capital gains that have been adjusted for the impact of inflation through  the facility of inflation indexation. We also suggest that you actively consider using the systematic investment plan (SIP) route so that you can make regular monthly investments.