Go for open-ended scheme that allows redemption, in case the fund does not perform
Insurance companies had discovered it long time ago. Mutual funds are now catching up with the trend. Marketing investments based on goals can attract more investors. There are at least four child plans that are pending with the Securities and Exchange Board of India (Sebi) for approval - Reliance Children Fund, SBI Children Benefit Fund, DSP Black Rock Children Gift Fund and Mahindra Mutual Fund’s Bal Vikas Yojana.
“Not many individuals understand manufacturers’ categorisation of identifying the product with the investment mandate. We are, therefore, talking investors’ language and naming the product based on their goals rather than selling them as balanced or hybrid funds,” says Karan Datta, chief business officer at Axis Mutual Fund.
Fund houses have child plans mainly in two categories - monthly income plans (MIPs) and balanced funds. MIPs come with 15-25 per cent equity and the rest in debt. Child plans in balanced fund category are equity-oriented and these invest 65 per cent in stocks either directly or through futures and option.
Some are best performers in their category. HDFC Children’s Gift Fund, for example, has returned 8.89 per cent and 25.47 per cent in the one- and three-year period, respectively. The category average (equity-oriented hybrid funds) is 7.29 per cent in the past year and 20.56 per cent for a three-year period.
Similarly, SBI Magnum Children’s Benefit Plan has 22.36 per cent returns in the past three years and 18.02 per cent in the past year. The MIP category returned 16.67 per cent and 8.90 per cent in the past one and three years, respectively.
While the first preference for an investor should always be using equity diversified fund along with a debt scheme, analysts say they are good options for individuals to save for their children unlike child plans from an insurance company. Balanced funds automatically rebalance a portfolio; depending on the market situation. They also capture the upside in equity, while protecting the downside.
But, investors need to keep their portfolio asset allocation in mind before investing in them. If you are saving for the long term (seven-eight years), opt for the equity oriented funds. Keep in mind that they maintain 65:35 equity-debt allocation and they should accordingly adjust their portfolio. For short-term goals, investors can use the child plans that are MIPs.
They also come with restriction on redemption. You can opt for a plan that restricts redemption until the child turns 18 or the investments complete three years.
After the child becomes a major, the investment needs to be transferred in her name and can only be withdrawn thereafter. The other option comes with a high exit loads, which are three per cent for redemption within a year, two per cent for redemptions between one and two years, and one per cent between the second and the third years.
“The lock-in helps to inculcate discipline in investors,” says D P Singh, executive director and chief marketing officer at SBI Mutual Fund. The average holding period in a mutual fund varies between two and three years. Due to the lock-in, investors are forced to stay longer “Our average holding period in child plans is 10 years, as we have received money for eight-nine-year-old,” says Datta.
Don’t opt for a lock-in plan as it takes away the flexibility of changing your investments if a fund is not performing.
“Investments are made with a goal in mind. As one moves closer to the goal, he needs to slowly move the money in a debt fund, which is not possible in the lock-in option,” says Dhaval Kapadia, director (investment advisory) at Morningstar Investment Adviser, India.
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Photograph: Michaela Rehle/Reuters
