Children’s funds represent a specialised category of mutual funds designed to help parents and guardians build financial security for their children’s future milestones.  Within this category, HDFC Children’s Fund has been a standout performer among the twelve funds in the segment.

Balanced investment approach

HDFC Children’s Fund employs the same investment approach as an aggressive hybrid fund, maintaining an equity allocation of 65-80 per cent with the remainder in debt instruments. Following SEBI’s recategorisation norms seven years ago, the fund has maintained its equity portion consistently between 64-66 per cent, compared to its earlier allocation of approximately 75 per cent.

The fund’s equity management focuses on companies demonstrating reasonable growth prospects across various market capitalisations.

The equity allocation typically dedicates around 40 per cent to large-cap stocks, with the remaining 25 per cent distributed between mid-cap and small-cap investments. Recent periods have shown increased allocation to small-cap stocks, with July 2025 data indicating 21 per cent in small-caps and approximately 2 per cent in mid-caps. Unlike category peers that maintain higher banking sector exposure, HDFC Children’s Fund has reduced banking allocations, instead focusing on sectors including cement, ferrous metals, industrial products, capital markets, and automotive.

The debt portion follows a  duration strategy based on interest rate movements. The fund’s portfolio average maturity has fluctuated, increasing from 3.6 years in September 2022 to a peak of 10 years in November 2024, currently standing at eight years. The debt allocation comprises 18 per cent government securities and 14 per cent corporate bonds.

Performance

The fund has delivered a compounded annual growth rate of 13 per cent over the last 10 years, outperforming  pure equity children’s funds from Tata and UTI that maintain approximately 80 per cent equity allocation (they clocked 11-12 per cent), as well as  ICICI Prudential and LIC MF children’s funds with similar allocations (which delivered 8-12 per cent).

A five-year rolling return analysis spanning the last 10 years reveals an average annualised return of 14.8 per cent, closely matching the Nifty 50’s total return of 15.1 per cent. During this period, the fund’s returns ranged between 7 per cent and 25 per cent, demonstrating reasonable consistency.

Expense ratios for this category are generally high. The expense ratio for the regular plan stood at 1.73 per cent, lower than the peer average of 2.1 per cent. For the direct plan, the ratio was 0.9 per cent below the category average of 1.2 per cent.

Structure

Children’s funds have several conditions attached to the investment, unlike hybrid equity funds which can also be used to meet child-related goals. These funds can only be opened in the name of a minor under 18 years of age at the time of investment. The application can be made by a parent or a court-appointed legal guardian.  In some cases, asset management companies also permit trusts and corporate entities to invest on behalf of a child.

These funds have a lock-in period which lasts for five years or until the child turns 18, whichever comes first. For example, if the investment is made when the child is five years old, the lock-in will last until she turns 10. If the investment starts when the child is 16, the lock-in will last for just two years until she turns 18.  Once the child turns 18, systematic investment plans (SIPs) or systematic transfer plans (STPs) in their name automatically stop, but the fund does not mature on its own. The invested amount can remain in the fund and continue to grow, but no new contributions are allowed in a minor’s account after they become a major.

When making the initial investment, proof of the child’s date of birth is required to confirm eligibility. Upon turning 18, the investor must complete the “minor-to-major” process, which includes updating the bank account details. Importantly, redemption proceeds are always credited directly to the child’s account, regardless of whose account funded the investment originally. Early redemptions are typically restricted but may be permitted under exceptional circumstances such as the death of the contributor or beneficiary.

Should you invest

Children’s funds compete with alternative investment products including Sukanya Samridhi Yojana, life insurance children’s plans, and NPS Vatsalya, each offering different structural features, liquidity provisions, investment tenures, asset allocation strategies, and tax treatments. Though children’s funds come with a lock-in of five years, they are not eligible for any tax deduction under Section 80C of the Income Tax Act.

You should go in for children’s funds only if you feel you need the discipline of the long lock-in period to stay the course with your investment. Or else, hybrid categories such as aggressive hybrid or balanced advantage funds can very well serve the same purpose for goals that are 5-7 years away. If the goal is over 7 years away, you can consider pure equity funds too, from the flexicap or passive large and mid-cap menu.

Published on August 16, 2025