Mutual Funds are an excellent way of investing for a child’s future. They can help pay for a child’s education, wedding, lifestyle choices, and even home purchase, depending on the returns you get. In this article, we explain how to invest in mutual funds for a child/minor.

What are the Best Mutual Funds for Children?

There are a number of child plans/children gift plans offered by various mutual funds that have a lock-in of 5 years or until the child attains majority. These funds are little more than marketing ploys.

A general high performing mutual fund can give you much better returns than a child plan. You can invest in the funds mentioned below if your time horizon is more than 5 years and you can bear a relatively high-risk level. If these conditions are not fulfilled, invest in short duration mutual funds, mentioned in this article.

Fund NameAUM (Crores)3- Year Returns (%)5- Year Returns (%)
SBI Small Cap FundRs. 3,2800.998.38
Axis Bluechip FundRs.12,7178.257.72
L&T Midcap FundRs. 5,367-4.245.41
HDFC Small Cap FundRs. 6,835-7.592.55
Nippon India Index Fund- Sensex PlanRs. 751.132.68

(Data as on 26 May, 2020; Source- Value Research)

1. SBI Small Cap Fund

By investing in a well-diversified basket of equity stocks of small cap companies, this fund focuses on providing the investors with long-term capital growth. The risk involvement is moderately high but the trailing returns are much higher than the benchmark over a period of 3, 5 and 7 Years.

Returns3 Year (%)5 Year (%)7 year (%)
Fund0.998.3820.07
Benchmark-15.05-3.414.49

If you would have invested Rs.1,00,000 for 7 years in this fund, the accumulated capital would have been Rs.3,59,783.78 (Considering the 20.07% CAGR, as on 26 May 2020)

  • The assets are allocated in the stocks of high potential, growth oriented businesses such as Dixon Technologies, Hawkins Cookers, JK Cement, Hatsun Agro Products etc.
  • A bottom-up approach for stock picking from small cap companies is used by the fund managers. The top sectors of asset allocation include Engineering, FMCG, Finance, Cons Durables and more
  • With an aggressive investment stance, this fund has invested 66% of the total assets in small cap companies
  • The fund has clearly outperformed the returns delivered by its benchmark with a significant number over a period of 1, 3, 5 and 7 years

Also Read: Best Small Cap Mutual Funds for 2021

2. Axis Bluechip Fund

As one of the best bluechip fund, this fund predominantly invests in Large Cap companies with 99% of total assets allocated in Large Cap and 1% in Mid Cap companies. This portfolio aggregate makes it a less volatile fund giving inflation beating returns if invested for at least 3 to 5 years.

Returns3 Years (%)5 Years (%)7 Years (%)
Fund8.257.7212.02
Benchmark-0.792.717.46

If you would have invested Rs.1,00,000 in this fund for 7 years, the accumulated capital would have been Rs.2,21,344.62 (Considering the 12.02% CAGR, as on 26 May, 2020)

  • According to portfolio valuations, there are 23 stocks in total which are carefully placed in Finance, Technology, FMCG and other defensive sectors. Also, large companies such as HDFC Bank, Kotak Mahindra Bank, ICICI Bank and Reliance Industries are the top issuers
  • Under a passive approach towards portfolio analysis, the fund managers have focused on generating equal or higher returns than the benchmark. And, the strategy has been successful as the fund has generated higher returns than the benchmark over 1-7 years
  • Since your investment intent is long term capital growth for children, this fund is a suitable option

3. L&T Mid Cap Fund

Midcap Funds can invest in companies ranging from the 101st largest to the 250th largest listed company in India. Such companies account for 15-20% of India’s total market capitalization. Many of them are typically dynamic, emerging challengers within their sectors and are likely to become tomorrow’s blue chip companies.

Returns3 Years (%)5 Years (%)7 years (%)
Fund-4.245.4116.08
Benchmark-4.893.4511.18

If you would have invested Rs.1,00,000 in this fund for 7 years, the accumulated capital would have been Rs.2,83,989.18 (Considering the 16.08% CAGR, as on 26 May, 2020)

  • Funds that can identify these winners can create a great deal of wealth for investors. L&T Midcap Fund is one such mutual fund
  • The fund has a 5 year return of 5.41% and 7 year returns of 16.08%
  • The fund manager, Soumendra Nath Lahiri does not rely on a few concentrated bets to achieve this return and has instead built a diversified portfolio of around 83 stocks
  • He has completed more than 5 years at the fund, building up solid experience across bull and bear markets. Investors in this fund have a good chance of seeing their wealth multiply manifold

4. HDFC Small Cap Fund

Small cap funds work best over very long term horizons which are associated with investing for a child. HDFC Small Cap Fund has emerged as a consistent out-performer and that too by a great margin.

Returns3 Years (%)5 Years (%)7 Years (%)
Fund-7.592.559.45
Benchmark-15.05-3.414.49

If you would have invested Rs.1,00,000 for 7 years in this fund, the accumulated capital would have been Rs.1,88,152.66 (Considering the 9.45% CAGR, as on 26 May, 2020)

  • As compared to the benchmark of HDFC Small cap fund, around 9% better returns were recorded over the last 3-year and 7% in 5-year periods
  • The fund has invested 3.89% of its assets in large cap, 19.30% in Mid-cap and 76.52% in small cap
  • About 4,850 of the 5,000 companies listed on the NSE and BSE are small caps giving these funds immense scope to deliver high returns through smart stock-picking
  • The fund manager of HDFC Small Cap has been changed recently in 2019. Earlier, the fund was managed by Chirag Setalvad and now the charge has been handed over to Amar Kalkundrikar

5. Nippon India Index Fund- Sensex Plan

An Index Fund is a type of mutual fund which constructs its portfolio by tracking the composition of a standard market index such as the Nifty 50 or the Sensex. The fund, not only invests stocks which constitute the benchmark index but also in the amounts in which they are present in the index.

Returns3 Years (%)5 Years (%)7 Years (%)
Fund1.132.686.90
Benchmark-0.792.717.46

If you would have invested Rs.1,00,000 in this fund for 7 years, the accumulated capital would have been Rs. 1,59,530.58 (Considering the 6.90% CAGR, as on 26 May, 2020)

  • Clearly, the fund has given better returns than its benchmark over a period of 3 years
  • There are 30 stocks in the fund’s portfolio placed dominantly in the Finance, Energy, Technology and FMCG sectors
  • The 5 top issuers in the portfolio are HDFC Bank, Reliance Industries, ICICI Bank, Infosys and Tata Consultancy Services
  • This fund, like all index funds, is ideally suited for investors who like to stay put with their investments for the long term. If you have a look at the historical performance of market indices, you would know for sure that they have performed well in the long run despite many instances of short term volatility

Can a Child Invest in Mutual Funds?

A child (minor) can invest in mutual funds but only through a guardian. This can be a natural guardian like a parent or a legal guardian appointed by the court. Only the guardian can operate the mutual fund investment until the child attains the age of 18.

After the age of 18, the guardian cannot operate the account. Existing SIPs, STPs and SWPs will, however, continue until the child (who has now attained majority) halts them by submitting appropriate documents. In addition, the child must submit a change of status request from minor to major, upon attaining majority.

Short Duration Mutual Funds for Children’s Education

If you are paying for your child’s education, you may need a fund that allows you to withdraw and pay fees every year or every semester. If these expenditures are less than 5 years away, short term funds would work better than equity funds.

These funds invest in relatively safer debt securities that have a short maturity period (1-3 years). We have shortlisted the following short-term fund for a child’s education. If you have more than 5 years for these fees/charges to become payable, invest in the equity funds mentioned below.

(Data as on May 26, 2020; Source- Value Research)

How to Use Short Duration Funds for Children’s Education?

You can either make lump sum withdrawals from these debt mutual funds or you can set up a Systematic Withdrawal Plan (SWP). In either case redemption within 3 years is taxed under Short Term Capital Gains Tax at your slab rate. Redemption after 3 years of investing is taxed at 20% and the benefit of indexation is given. Indexation reduces your tax liability to account for inflation.

Income Tax on a Child’s Mutual Fund Investment

Transfer of money from a parent to a child and vice versa is free of income tax. There is also no gift tax applicable. However, the income earned by a child from mutual fund investments is liable to be clubbed with the parent’s income for the purposes of Income Tax. Hence investing in the name of the child is not a good way of saving income tax.

Other Mutual Funds for Children

Here is a list of 10 Mutual Funds for Children which can be considered for investments in 2020:

Scheme Name1 Year Return3 Year Returns5 Year Returns
Mirae Asset Emerging Bluechip Fund-14.13%1.25%9.74%
Invesco India Growth Opportunities Fund-15.41%2.14%5.39%
Kotak Select Focus Fund-19.90%-0.72%5.60%
Canara Robeco Emerging Equities-14.39%-0.35%7.46%
ICICI Prudential Bluechip Fund-19.46%-0.38%3.88%
Principal Emerging Bluechip Fund-15.25%-1.22%5.85%
SBI Equity Hybrid Fund-9.94%4.01%5.83%

(Data as on May 26, 2020; Source: Value Research)

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