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Best children investment plan: Mutual funds?

Last updated on: May 2, 2011 18:23 IST

Best children investment plan: Mutual funds?

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Sridhar Nag, Investmentyogi

One of the top priorities for most parents is to provide high quality education to their children and why not? Education is the best investment you can make in your child. Unfortunately the cost of education is going up at an alarming rate. This is true for primary school to higher education. How do you ensure best possible education to your kid in such a scenario?

The short and simple answer is make investments which can give you good inflation-adjusted returns over a sufficiently long horizon.

Picking up the right investment instrument can be daunting as there are too many products offering "best/guaranteed returns" especially the ones coming from insurance companies. Investments for child's education has a long horizon and hence it makes sense to invest in equity instruments (like mutual funds) which can give superior returns at lowest possible cost. Mutual funds are also very well regulated and transparent in nature. There is enough number of funds in the market which are designed specifically for this purpose.

Read on to know more.


Photographs: Investmentyogi
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Best children investment plan: Mutual funds?

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What are mutual fund children plans?

These funds are similar to a hybrid funds in terms of their asset allocation which means that they have equity as well as debt components. These plans have multiple options based on the risk you are willing to take.

For example in an aggressive plan, the portfolio will have up to 70 percent exposure to equities and balance in debt. In a more conservative fund the equity exposure will be lower. Generally the investments are made in asset classes like equities, debt and gold.

Some funds come with an option of minimum 3 year lock in period or till the child attains the age of 18 whichever is later.  The idea is to make the money work for longer duration.



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Best children investment plan: Mutual funds?

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Advantages

1. Asset allocation:

Investors often struggle with the question of asset allocation. They have lot of confusion and difficulty in figuring out how much of their money should be in stock market and how much should be in safe FDs. For those investors mutual fund children is a good alternative. Invest in the fund as per your risk tolerance and you will not have to worry about different asset classes to manage.

2. Professional management and lower cost

These funds are managed by investment professionals as per the stated objectives. This eliminates the investors of difficult task of timing the market.

Unlike ULIPs, these funds have a very crisp and clear cost structure. Most of these funds are charging less than 2.25 per cent per annum as expenses. While ULIPs have multiple charges like premium allocation charge, policy administration charge, fund management charge that eat up around 5 to 6 per cent of your premiums in the initial years.

3. Liquidity

Unlike ULIP premiums, mutual fund SIPs are highly liquid. You can stop and exit any time you want and you wouldn't be penalised



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Best children investment plan: Mutual funds?

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Disadvantages

1. Higher fees

Even though the charges are much less than a typical ULIP, for a hybrid fund, even the fees of 2.25 per cent is on the higher side.  

2. No assurance

Unlike a fixed deposit the value your investment is subject to market risks. The best way to minimize this risk is to for SIP.  

Some of the best performing mutual fund children plans are as follows (the values are in per cent CAGR):

Conclusion:

Children plans from mutual funds proves to be a better option when compared to similar insurance plans with less fees more liquidity and clarity. There are several plans available in the market, parents should be very careful while selecting the best for their child's future. Whichever plan you select do some analysis on cost structure, past track record and hidden costs etc.  



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