Child Plans from Mutual Funds: Should you invest?
If you are a parent, you unarguably aspire to offer the best to your children - a sound education, a decent lifestyle and a grand wedding. Some of us also dream of buying a house for our children when they grow up and not to mention help them to establish their own businesses. But in order to fulfil these desires it is imperative that you follow the right approach towards planning for your financial goals. And for those of you who think that it is too early to plan for your child's future, let us apprise you that it is never too early to work towards achieving these goals as it will not be too long before your little bundle of joy grows up. You might be in awe when the kid who played with toy planes in his childhood came to you one day sharing his ambitions of becoming a pilot or when your little girl who dressed up dolls as a child decided to become a top fashion designer. Every parent wants to see his child do well in his chosen career option. But this sheer happiness of hearing your child's dreams could become sour in case you never planned or saved for his future.
Data as on December 01, 2013.
Today, people have started realising the fact that the high cost of education and sky rocketing marriage expenses can put you knee deep in debt if you don't save regularly. But the question we want to ask you is - can saving alone be enough? Unless you don't invest your hard earned money in the appropriate investment avenues, the inflation bug will eat the value of your savings every single day. Recognising this concern, many companies have launched a number of financial products which claim to take care of most of the expenses associated with your child's future. However many of these "childcare" investment plans turn out to be nothing but costly Unit Linked Insurance Plans (ULIPs). You see, more often than not ULIPs and endowment plans don't offer adequate insurance and nor do they generate adequate returns which can counter inflation. Some Mutual Fund houses too have launched products which are said to have designed especially to take care of childcare expenses.
Now, you might be wondering what exactly these "child care" mutual fund schemes are. It is noteworthy that most of the schemes function like normal mutual fund schemes but with a different asset allocation pattern. While some might have a higher exposure to debt to provide stability to the portfolio especially for investors whose financial goals are near to realisation, others might focus more on equity investments to provide growth for their investors whose goals are far from maturity. However another key difference between diversified equity oriented mutual fund schemes and speciality child care schemes is their "exit load". Since investing for your child's future is considered a long term investment, most of these schemes come with a high exit load to discourage parents from early redemption. Let's have a look at how some of these schemes have fared-
Equity and Debt Exposure to respective funds is as per portfolio as on October 30, 2013
*Risk is measured by Standard Deviation; **Risk-Adjusted Return is measured by Sharpe Ratio. They are calculated over 3-Yr period assuming a risk-free rate of 7.38% p.a.
(Source: ACE MF, PersonalFN Research)
In the above table, we have compared almost all the existing children benefit plans offered by mutual funds with four balanced funds (viz. ICICI Pru Balanced Fund, HDFC Balanced Fund, Canara Rob. Balanced Fund and FT India Balanced Fund). We have also taken into consideration some broadly followed benchmark indices (S&P BSE Sensex and Crisil Balanced Fund Index) for comparison purposes. While comparing these funds, it will be prudent to compare those funds with a similar asset allocation. Although HDFC Children's Gift Fund-Investment features among the top performing funds in the category across the last 1 and 3 year time frames, it carries a high exit load of 3% and is one of the most volatile funds in the category (with a standard deviation of 3.63%, calculated over the last 3 years). However when compared to S&P BSE Sensex, the fund has performed well across most time frames and also been less volatile than the index. It is noteworthy that the same cannot be said for all the funds in the child plans category since many funds in the category have generated poor returns vis-a-vis the S&P BSE Sensex Index across the last 1 and 5 year time frames.
In the balanced funds category, ICICI Pru Balanced Fund (an equity oriented balanced fund with a similar asset allocation pattern as HDFC Children's Gift Fund-Investment) has been giving tough competition to HDFC Children's Gift Fund-Investment with lower exit load and standard deviation. It has also managed to outperform most other funds in the category of balanced funds over 1 and 3 year time frames. When compared against the Crisil Balanced Fund Index, ICICI Pru Balanced Fund has managed to beat this index across almost all time frames. It is noteworthy that all the 4 funds in the balanced funds category have managed to outperform the Crisil Balanced Funds Index across the last 1, 3, and 5 year time frames.
You see, investing merely in specialty funds may not help fulfil all your objectives. Let us explain you this with a very simple example- when wanting to buy any consumer durables (such as television, refrigerator or even mobile phones) most of you will compare the features of competitor products and brands (such as price, warranty, quality, longevity, reviews etc.) irrespective of their attractive packaging or advertisements. We have been taught since our childhoods that what we see may not always be true in reality. It pays to thoroughly analyse everything that you are putting your hard earned money into. The same is true in case of speciality funds as well.
PersonalFN is of the view that, you shouldn't get carried away with the name of the fund and instead chalk out your financial planand maintain your asset allocation. If correctly chosen, plain diversified equity oriented funds might also suffice your objective of providing the best to your children. Moreover, it is important for you to understand that regardless of how old your child is and how much time you have left for realisation of your goals, you must start saving and investing from today itself. And, as many of you might have several doubts and uncertainties about how to plan and where to invest for meeting these goals, it would be prudent to take the help of an experienced investment consultant, who might help you manage your finances better.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
More Views on News
Mar 10, 2016
An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.
Feb 29, 2016
Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.
Feb 12, 2016
PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.
Feb 2, 2016
Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.
Feb 1, 2016
Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...