Children's Gift Fund

What is a Children's Gift Fund?

A Children's Gift Fund is a type of mutual fund that invests in both stocks and bonds to help kids reach their goals. You can invest in a Children's Gift Fund on behalf of your minor child, and the money is locked up until they become 18 or for at least five years, whichever comes first. 

These open-ended plans are designed to grow your money while encouraging disciplined saving. Since 2019, they have been in SEBI's solution-oriented category.

Key Features of a Children's Gift Fund

A children's gift fund offers the following benefits to an investment: 

• A parent or legal guardian opens the fund in the child's name and takes care of it until the child turns 18.
• The investments are locked in for five years or until the child turns 18, which ensures they stay disciplined for a long time.
• The fund grows based on market performance, though it does not guarantee returns.
• Fund managers actively choose stocks and allocate assets for optimal growth.
• You can start investing with just ₹500 as a lump sum or ₹100 via SIP.
• The fund provides daily NAV updates so you can track your investment anytime.
• With a Step-up SIP, you can add more money to your investment over time to keep up with rising costs and inflation.

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Types of Children’s Gift Fund

The Children’s Gift Funds are mainly categorised based on asset allocation and risk appetite:

Note: If your investment horizon is 10 years or more, aggressive children’s gift funds may be suitable for higher growth. If you want to reach your goals sooner, you can choose conservative funds.

Importance of a Children's Gift Fund

A children’s gift fund offers the following benefits on your investments:

• These funds protect children's dreams from 10-12% education inflation and build over ₹1 crore through the power of compounding.
• When you invest in these funds through Systematic Investment Plans (SIPs), rupee-cost averaging is used to lessen the effect of volatile market prices.
• The built-in lock-in period makes it hard to spend money, unlike typical mutual funds, where parents often take money out early.
• Fund managers of the Children's Gift Funds focus on "future-proofing the child goals" like paying for college and moving assets from equities to debt as the child gets older.
• Investing early can magnify returns over time due to the power of compounding.

Tax Rules for Children's Gift Fund

The following are the tax regulations for the Children's Gift Fund:

• Long-Term Capital Gains (LTCG): If your long-term gains cross ₹1.25 lakh, the excess amount is taxed at 12.5%, with no indexation benefit under the revised rules.
• Short-Term Capital Gains (STCG): Gains are taxed according to the investor’s income tax slab if the investment is sold in the short term.
• Gifts to Minors: Investments made for a minor remain tax-free as long as the child’s yearly income does not exceed ₹2.5 lakh.
• Clubbing of Income: All of the child's income from the Children’s Gift Fund is added to the parent's taxable income when filing ITR, with a few exceptions.
• Section 80C Benefit: Children’s gift funds linked to ELSS qualify for a tax deduction up to ₹1.5 lakh per year under Section 80C, along with long-term growth potential. 

Limitations of a Children's Gift Fund

The following are some of the main drawbacks of investing in a Children’s Gift Fund:

• You cannot access the money during the lock-in, even in emergencies.
• High equity exposure can cause short-term fluctuations in returns.
• You must convert the account to an adult account when the child turns 18, which requires additional documentation.
• These funds typically have expense ratios of 1–2%, higher than low-cost index funds.
• Returns depend on market conditions and may be low or negative during market downturns.

Conclusion

A Children’s Gift Fund can help you build a strong financial base for your child’s future goals. It provides professional fund management, diversification, and the potential for long-term growth. Before investing, it is important to evaluate market risks, lock-in requirements, costs, and tax rules. Always select a fund that matches your child’s age, your goal horizon, and your comfort with risk. Choosing the best SIP depends on long-term financial goals.