Anything made in the late '60s or early '70s is not necessarily 'psychedelic' and this is coming from an expert. I found it charming for its amateur quality and anyone who knows certain aspects of the Thumbelina story, particularly certain terminology related to her origin, the case could be made that if she seems 'psychedelic' it's because of that.
Those who know the story and anything about what the first generation of hippies were called will know exactly what I mean.
The only downside here is that it was obviously created as some sort of advert for a defunct Florida amusement park and that interferes with the framing of the film. It was later made into part of an even more confusing "Santa Claus and the Ice Cream Bunny".
I'm the sort of person who enjoys a certain sort of amateurishness in movies, so your mileage may obviously differ. As to potential for giving kids nightmares, there's nothing violent at all here. NOTHING.
