Children's Funds

What Are Children's Funds?

A children's fund is a mutual fund scheme designed to help parents and guardians save for a child's future needs, such as higher education or marriage. Under the Securities and Exchange Board of India's (SEBI) 2017 categorisation framework, children's funds were part of the "Solution Oriented Schemes" group and carried a defining feature: a lock-in of at least 5 years or till the child attains the age of majority, whichever is earlier.

The lock-in was meant to protect money set aside for a child from being withdrawn for other purposes. Each scheme chose its own asset allocation, so some children's funds were equity-heavy while others were hybrid or debt-oriented.

How Does a Children's Fund Work?

Under the 2017 framework (relevant for existing investors)

1. A parent or guardian invests, often in the child's name, by lump sum or SIP at the applicable Net Asset Value (NAV).
2. Each investment is locked in for at least 5 years or until the child turns 18 (the age of majority), whichever comes first. For SIPs, the lock-in typically applies to each instalment separately (check the Scheme Information Document, SID).
3. The fund invests as per its stated asset allocation.
4. After the lock-in, money can be redeemed or switched, subject to any exit load.

What happens now

• If your AMC continued the children's fund: it can keep operating under SEBI's Master Circular conditions. Check the current SID for features such as the lock-in.
• If your AMC discontinued it: fresh subscriptions stop, and the scheme is merged with another scheme having a similar asset allocation and risk profile. A merger is treated as a change in fundamental attributes, and SEBI rules generally require unitholders to be offered an exit option at NAV without exit load during a specified period.

The replacement: Life Cycle Funds

Life Cycle Funds are open-ended, target-date funds whose asset allocation follows a glide path: more equity when the maturity date is far away, gradually shifting to debt as it nears. Under SEBI's framework:

• Tenures range from 5 to 30 years, in multiples of 5; a fund house can have up to six such funds open for subscription at a time.
• The maturity year is part of the name (for example, "Life Cycle Fund 2040"), which makes it easy to match with a child's expected college year.
• Exit loads apply: 3% if you exit within one year, 2% within two years and 1% within three years of investment.

Practical Example (Illustrative)

Part A: How the lock-in worked

Rakesh invested ₹1,00,000 in a children's fund for his daughter, who was 15 at the time.

• 5 years from investment: daughter's age 20
• Age of majority: 18
• Lock-in ends at the earlier date: when she turns 18, i.e. after 3 years.

Part B: Planning a goal amount

Suppose parents want ₹20,00,000 for their child's higher education in 12 years. Assume an illustrative return of 10% a year, compounded monthly, with SIPs at the start of each month (144 instalments). Actual returns will vary.

• Monthly rate = 10% ÷ 12 ≈ 0.833%
• SIP factor = [((1 + 0.10/12)^144 − 1) ÷ (0.10/12)] × (1 + 0.10/12) ≈ 278.74
• Required monthly SIP = ₹20,00,000 ÷ 278.74 ≈ ₹7,175
• Total invested = ₹7,175 × 144 ≈ ₹10,33,200

Starting early reduces the monthly amount needed, because compounding has more time to work.

Why Is It Important?

• Education costs tend to rise over time, so a dedicated, long-term plan can help.
• Separating the child's money reduces the risk of it being used for other needs.
• Regulatory changes affect existing holders: a merger may change your scheme's allocation, risk and costs.
• Product choice matters: a target-date Life Cycle Fund, a continuing children's fund, or a diversified portfolio could fit different families.

Key Features

Benefits and Limitations

Benefits

• Goal clarity for a child's future expenses.
• Built-in discipline through lock-ins (older framework) or exit loads (Life Cycle Funds).
• Long-horizon compounding when started early.
• Automatic de-risking in Life Cycle Funds as the goal date nears.

Limitations and risks

• Restricted access during the lock-in or exit-load period.
• Market risk: equity-oriented schemes can fall in value close to the goal date.
• Transition uncertainty while schemes are continued, merged or restructured.
• Generic glide paths may not match the exact timing of your child's needs.

Children's Funds vs Related Concepts

How Does It Apply to Mutual Fund Investors?

• Existing investors: Check whether your AMC continued the scheme or plans to merge it. If merging, compare the new scheme's allocation, riskometer and costs, and consider whether to use any exit window.
• Investing for a minor: Mutual fund investments can be made in a minor's name with a parent or legal guardian, as per AMC and RTA procedures. When the child turns 18, the folio's status needs to be changed to major, as per the process specified by the fund house.
• Goal matching: Choose investments whose timeline matches the goal, and reduce equity exposure as the goal approaches, either manually or through a glide-path product.
• Taxation (check current rules): Tax depends on the scheme's portfolio. Funds with at least 65% in domestic equity are taxed as equity-oriented funds (short-term gains at 20%; long-term gains above ₹1.25 lakh a year at 12.5% after 12 months, for transfers on or after 23 July 2024). Funds with more than 65% in debt are "specified mutual funds", with gains on units bought on or after 1 April 2023 taxed at slab rates. Income of a minor may be clubbed with a parent's income under income-tax rules. The Income-tax Act, 2025 applies from 1 April 2026, so confirm details with a tax adviser.

Common Mistakes and Misconceptions

1. "Children's funds have been shut down completely." Correct understanding: SEBI discontinued the category, but its Master Circular lets AMCs opt to continue existing children's funds (alone or together with their retirement funds), subject to Life Cycle Fund restrictions. AMCs that discontinue must merge them. Why it matters: Your scheme's status depends on the fund house.

2. "The lock-in always lasts until the child turns 18." Correct understanding: It was at least 5 years or until majority, whichever is earlier. Why it matters: For older children, the lock-in could end well before 5 years.

3. "A children's fund is automatically low risk." Correct understanding: Many such schemes had high equity exposure. Why it matters: Check the riskometer, not just the label.

4. "Life Cycle Funds lock my money in." Correct understanding: They have no lock-in but charge exit loads of 3%, 2% and 1% in the first three years. Why it matters: Early exits cost more, so plan the holding period.

Important Terms to Know

• Lock-In Period: Time during which units cannot be redeemed. Related glossary topic.
• Retirement Funds: Solution-oriented schemes aimed at retirement. Related glossary topic.
• Financial Goals: Specific targets your investments are meant to fund. Related glossary topic.
• Systematic Investment Plan (SIP): Investing a fixed amount at regular intervals. Related glossary topic.
• Scheme Merger and Consolidation: Combining two or more schemes into one. Related glossary topic.
• Mutual Fund Nomination: Naming who receives units in the event of the holder's death. Related glossary topic.
• Short-Term, Medium-Term & Long-Term Goals: Classifying goals by time horizon. Related glossary topic.

Key Takeaways

• Children's funds were solution-oriented schemes with a lock-in of 5 years or till the child turns 18, whichever is earlier.
• SEBI discontinued the category in February 2026; its March 2026 Master Circular lets AMCs continue their Children's Fund, Retirement Fund or both (each with Life Cycle Fund tenure restrictions), or discontinue both and merge them.
• Life Cycle Funds are the new target-date option, with a glide path and exit loads instead of a lock-in.
• Existing investors should track AMC notices about continuation or mergers.
• Tax depends on the scheme's asset mix, and a minor's income may be clubbed with a parent's.

Related Glossary Terms

• Retirement Funds
• Lock-In Period
• Scheme Merger and Consolidation
• Financial Goals
• Systematic Investment Plan (SIP)
• Hybrid Mutual Funds

References

• SEBI, Circular on Categorization and Rationalization of Mutual Fund Schemes, 26 February 2026
• SEBI, Master Circular for Mutual Funds, 20 March 2026
• SEBI, Circular on Categorization and Rationalization of Mutual Fund Schemes, 6 October 2017
• AMFI, Tax Regime for Mutual Funds

Disclaimer

This content is for educational and informational purposes only and is not personalised investment, tax or legal advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. The regulatory status of specific schemes may change; refer to your AMC's latest communication. Consult a qualified tax adviser for tax matters. Investment decisions should consider your financial goals, risk profile and the relevant scheme documents.

Saving for your child's future? Explore related terms in the FynnChintan Financial Glossary and learn more about goal-based financial planning.