In the previous blog post we discussed about Sukanya Samruddi Yojana scheme to encourage parents to save for the girl child’s education or marriage. Continuing the same discussion, in this blog post, let’s look at another category of investment option to fulfil your children’s dreams.
What are Children’s gift funds
Children's Gift Funds are a hybrid equity mutual funds which invests in equity (up-to 65%) and debt(up-to 35%). Unlike Sukanya Samrduddi Yogana, parents can invest in Children’s Gift Funds for a boy and girl. It is not restricted to only girl children . There is no upper limit on how much you can invest in a Children’s gift fund.
Fund Objective
The objective of children’s gift funds is to encourage parents to think about the long term financial goals specific to their children. For example, education expenses have been increasing at a rapid pace in the last 10 years.
Following chart shows expected rise in the cost of higher education in the next 15 years as per one of the recent survey.
Parents can use their children's education fund to save enough and beat the education inflation so that they have enough funds when their child needs it. Children’s gift funds invest in high quality stocks and AAA rated bonds to protect the capital and at the same time provide good returns.
Important details about Children’s gift funds
Who can open: The account can be opened by any relative and non-relative of the child.The account can be opened for any child below 18 years.
Maximum Entry Age Limit: The account needs to be opened before the child turns 18 years old.
Documentation: The investor/donor/guardian who is opening the account on behalf of the child should have a valid kyc for investment in a mutual fund.
Bank Account in the name of Minor Child: The beneficiary minor child should have a bank account. The redemption proceeds will be credited to the child's bank account.
Min Investment: varies from fund to fund. Typically 100 or multiples of 100.
Recommended Investment Horizon: Typically these funds have a minimum investment duration of 5 years. Investment can be continued till the child completes 18 years.
Partial Withdrawal: Partial withdrawals are allowed after 5 years or child completes 18 years of age.
Returns
Unlike SSY, returns on children’s gift funds are dependent on the market performance not fixed. It may sound very risky. True, it is a little bit risky in the short term, which is less than 5 years. However, when the goal is long term, such as children's education which is after more than 10 years, equities beat all asset classes by a huge margin. Following graph show the average yearly return of various asset classes in the last 40 years.
Let’s look at the returns of one of the popular children’s gift funds which is HDFC children’s gift fund. The fund’s inception date was on March 02, 2001. Since inception, the fund has given a CAGR of 16% compared to Average return of 8% on Sukanya Samruddi Yojana scheme . Its NAV has grown from Rs 10 to 215 as of June 09,2023. It means, 2 lakh investment in March 2001 is worth 43 lakhs today. Despite a good chunk of money invested in bonds, hybrid funds giving returns of 16% over 20+ years is not an ordinary feat.
Summary
Sukanya Samruddi Yojana and Childrens gift funds are two different investment options available for the parent to build corpus for their children's milestones such as higher education or marriage. whichever the method you choose, it is important that you plan early and think long term. Unless you define your goal and make a financial plan it is very difficult to achieve what you want to achieve.
Another important aspect of planning is, as a parent or gaudian, having adequate life coverage. Risk management also important in the financial planning. Unfortunately something happens to you, you still want your child to pursue their dreams. You should buy a pure term plan to make sure your family has adequate financial cushion.
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