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Home > Business > Personal Finance

A fund holiday for your child

Nikhil Lohade in Mumbai | May 04, 2004 09:30 IST

Savings through a mutual fund can be of immense benefit to children over a period of time. If it is possible to start saving for a child, here is how a child's lifecycle financial planning can be done:

Typically, parents start thinking of a child's senior education once the child attains 9-10 years of age and the parents too are in a position to save sufficient surpluses with the growth in their professional careers.

At this stage, the years of college education are still about 8-9 years away. Hence, if one starts saving for a child at this stage, the horizon for the savings is reasonably long.

Consequently, it may be advisable that savings for a young child are done in a mix of equities and debt both. However, these should be carefully managed so that over a period of time, the returns are optimised.

If one starts saving for a child at a young age, statistical evidence shows that over a period of time compounding works in the favour of the saver.

Thus, if saving starts at an early age of around 9-10 years, when the child matures and is looking towards college education, the savings would be a great help.

There are several products available in the market to enable financial planning for a child's lifecycle. Several products also have an added benefit of insurance.

UTI was the first mutual fund to introduce such products in the market but at the same time it was responsible in decline in investor trust in the category as it had to withdraw Rajlakshmi and other unsustainable guaranteed returns product in the low interest regime.

The oldest private sector product in this category is the Tata Young Citizens' Fund. Launched in October 1995, the fund enjoys wide retail participation and today has an investor base of over 70,000 for children aged between 3 months and 18 years.

Since all these are balanced funds with substantial equity holdings, they have all benefited from the recent surge in equity markets as can be seen from the adjoining returns chart.

For an informed investor however, the quantum and consistency of long term returns should be the key decisive factor in investing.

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