Mutual Fund Unlocked: Children Plans from Mutual Funds

The children plans in mutual funds, as the name suggests, are targeted towards the people having child or children. This concept came from the insurance industry which had came up with child insurance plans. This was a complete marketing gimmicks.

Children plans in mutual funds are those investments that are held in the name of a child as a beneficiary and guardian or parent as a donor, as minor cannot hold investments solely in his/her name.

The fund composition of child plan in mutual funds is generally as that of a hybrid category of mutual funds i.e. 65 per cent to 80 per cent in Equity and 35 per cent to 20 per cent in Debt, if the structure adopted is of Aggressive Hybrid. In case of balanced hybrid structure, 40 per cent to 60 per cent in Equity and 60 per cent and 40 per cent in Debt. When 10 per cent to 25 per cent in Equity and 90 per cent to 75 per cent in Debt, it means it has adopted a  Conservative Hybrid structure. As per the recent SEBI guidelines on mutual funds categorization, children plans would be in Solution Oriented Category.

Since these are tied to child’s goals then may it be education or marriage, these kind of mutual funds have some restrictions on withdrawal. As these kind of mutual funds come under Solution Oriented Category, they have a lock-in period of at least 5 years or when child attains age of majority, whichever is earlier.

So question still remains, should you invest in such mutual funds? The answer to it is a big ‘NO’ because, as the child plan can attract many investors due to its emotional touch to it, so it's eventually easy to market such mutual funds. Since this comes under solution oriented category, there would be a minimum lock-in period of 5 years which means it would be difficult to withdraw from a non-performer and invest elsewhere. Without these kinds of mutual funds also savings for child can be taken care of. As per requirement you may start an SIP or a lump sum investment in any funds matching your risk profile with no lock-ins or conditions and also if you need a corpus for your child in your absence or in a situation of disability due to which your income stops, you may very well opt for Term Insurance for death benefit and/or personal accident insurance for covering loss of income due to disability.