Children's Funds & Solution-Oriented Schemes – Are They Worth It?

Introduction

For the majority of Indian parents, creating a financially secure future for their children is one of their greatest wishes. From paying for higher education to wedding costs or for financial independence, mutual fund organisations have introduced Children's Gift Funds and Solution-Oriented Schemes aimed at such long-term objectives. The funds feature a lock-in period, goal-based investment, and tax advantages.
But are the schemes really worth it, or can plain diversified funds perform better? Let's analyse how such funds operate, their advantages and drawbacks, and when they can fit into your plan.

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What Are Children’s Gift Funds and Solution-Oriented Schemes?

According to SEBI’s mutual fund classification, “Solution-Oriented Schemes” include Children’s Funds and Retirement Funds. These funds are designed to help investors achieve a specific long-term goal rather than just general wealth creation.

Children’s Funds

aim to accumulate wealth for a child’s future needs such as education, marriage, or higher studies abroad.

Retirement Funds

are targeted at building a retirement corpus for investors.
The defining feature of these schemes is a mandatory lock-in period of 5 years or till the child attains 18 years of age (whichever is earlier). This encourages disciplined investing and prevents premature withdrawals.

How Do These Funds Operate?

Children's Gift Funds typically invest in a combination of equity and debt based on the fund's declared goal and risk level. For example:

Aggressive Plans:

70–80% in equities, suitable for long-term growth.

Hybrid Plans:

Balanced allocation between equity and debt for moderate risk.

Conservative Plans:

Higher debt exposure for stability and lower volatility.

These funds can be structured as either open-ended (with lock-in) or close-ended, and the investment can be made either as a Systematic Investment Plan (SIP) or a lump-sum gift in the child’s name.

Why Are These Funds Popular?

Goal-Linked Investing:

The idea of having a fund dedicated to a child’s goal adds psychological discipline and emotional attachment. Parents are less likely to redeem these funds prematurely.

Lock-In Encourages Long-Term Investing:

The mandatory lock-in helps investors stay invested through market cycles — crucial for goals like education which are 10–15 years away.

Professional Management:

These funds are managed by experienced fund managers who maintain an asset allocation suited to long-term growth and inflation-adjusted returns.

Gift Option:

Certain AMCs permit parents, grandparents, or other relatives to invest under the child's name, thus turning it into a worthwhile financial gift rather than regular cash gifts.

Potential Drawbacks

While these features sound appealing, investors should be aware of the limitations before committing long-term capital:

Lack of Flexibility:

The lock-in period restricts withdrawals even if you need funds urgently or find a better-performing scheme elsewhere.

Performance Varies Widely:

Not all Children’s Funds outperform regular diversified equity funds or hybrid funds. Some have delivered below-average returns compared to flexi-cap or balanced advantage funds over 10-year horizons.

No Special Tax Advantage:

While marketed as “children-focused,” these schemes don’t offer extra tax benefits under Section 80C or 10(10D). The gains are taxed like any other mutual fund — equity-oriented funds attract 10% long-term capital gains tax above ₹1 lakh, and debt-oriented funds follow the new uniform taxation rule (taxed as per income slab).

Emotional Bias in Selection:

Investors often choose such schemes for sentimental reasons rather than evaluating them purely on performance, cost, and asset allocation efficiency.

Comparing with Regular Mutual Funds

Let’s take an example. Suppose you invest ₹5,000 per month for 15 years. You can either choose a Children’s Gift Fund (Aggressive Hybrid) or a Regular Flexi-Cap Fund.
1.  A good flexi-cap fund historically delivered around 12–14% CAGR.
2. Many children-focused funds have delivered around 10–12% CAGR, depending on their equity allocation.
While the difference may look small, over 15 years, the compounding effect can create a gap of ₹3–4 lakhs or more. The key takeaway — the “label” of the fund doesn’t guarantee superior returns.
However, the psychological benefit of discipline from the lock-in period can be valuable for some investors who tend to redeem early.

When Do These Funds Make Sense?

Children’s or solution-oriented schemes may be suitable if:
1. You want to create a long-term corpus for a defined goal like education or marriage.
2. You prefer a set-and-forget approach without frequent portfolio reshuffling.
3. You value the forced discipline due to the lock-in period.
4. You are investing in your child’s name and want to make it a goal-based gift.
But if you're an active investor who monitors portfolio performance and is not averse to rebalancing between equity and debt funds, you may realise greater flexibility and performance by constructing a tailor-made portfolio of diversified funds.

How to Choose the Right Children’s Fund

If you decide to invest in one, here’s what to check:

1. Fund Category and Risk Level:

Check the asset allocation — is it aggressive (equity-heavy) or conservative (debt-heavy)?

2. Track Record:

Look at 5-year and 10-year returns compared to benchmark indices and peer funds.

3. Expense Ratio:

Lower expense ratios improve long-term returns.

4. Consistency of Fund Manager:

Stability in management often leads to steadier performance.

5. Lock-in Terms:

Check if redemption is permitted before 5 years and on what terms.
Some well-known examples in India include:
1. HDFC Children’s Fund
2. ICICI Prudential Child Care Fund
3. Axis Children’s Gift Fund
4. Tata Young Citizens Fund

Alternatives Worth Considering

If you’re not convinced about locking into a solution-oriented fund, consider these alternatives:
1. SIP in Flexi-Cap or Balanced Advantage Fund — flexible allocation and liquidity.
2. Debt or Liquid Funds — for short-term education goals.
3. Public Provident Fund (PPF) — safe, long-term, tax-free corpus builder.
4. Sukanya Samriddhi Yojana — for girl child, offers higher interest and Section 80C benefit.
These can provide similar goal-based outcomes with more flexibility and sometimes better tax efficiency.

Conclusion

Children’s Gift Funds and Solution-Oriented Schemes serve a clear purpose — promoting goal-based, disciplined investing for long-term needs like education or marriage. However, investors should not be swayed by the emotional marketing alone. The lock-in period and returns must align with your financial plan and risk profile.
In many cases, a well-chosen diversified mutual fund portfolio can achieve similar or better outcomes with greater flexibility. Still, for parents seeking emotional commitment and structured discipline, a Children’s Fund can be a suitable long-term tool — as long as it’s backed by research and aligned with realistic expectations.