• THE OUTSIDE VIEW
  • JULY 4, 2013

Are Children Benefit Plans really worthy?

Educating your children is your top most responsibility towards them in today's age. But along with that you must have planned dozens of things for them. May be, you want to celebrate her every birthday by throwing a grand party. Buying your son a bike as soon as he turns 18 must be also on your list. And yes, the list would be incomplete without a mention of a big bang wedding.

With growing cost of education, many of you must have recognised the need of investing systematically for your child's education. However, other expenses often go unplanned and may put strain on your finances. Being aware about various expenses associated with your child and her upbringing; various companies launch a number of financial products. These products claim to take care of most of these expenses. Hasn't anybody tried selling you a "childcare" investment plan which you later found out was a costly Unit Linked Insurance Plan (ULIP)? People hardly bother about calculating estimated returns that may be earned on their traditional plans. Mutual Fund houses too have launched products which they claim to have designed especially to take care of childcare expenses. ULIPs and endowment plans don't offer adequate insurance and they don't generate adequate returns either. It now remains to be seen how specially tailored products offered by mutual funds have performed and if they really hold any merit. Let's find out...

Idea of launching specialty children benefit funds was to infuse the habit of regular saving in investors. Thus exiting from these funds is discouraged by charging heavy exit loads which go as high as 4% and minimum investment period is also set higher. However, retaining investments for long doesn't guarantee good performance. We must find out how funds have fared.

Performance of Children's Benefit Mutual Funds
  Average Returns Average Risk-Ratios
6-Mth (%) 1-Yr (%) 3-Yr (%) 5-Yr (%) Std. Dev (%) Sharpe Ratio
Children's Benefit MFs- equity oriented -4.3 6.9 3.3 7.2 3.98 -0.01
Children's Benefit MFs- Debt oriented 0.5 7.5 7.2 8.0 1.36 0.06
Balanced Funds -4.1 8.0 3.2 7.6 3.67 -0.01
S&P BSE 200 -6.7 7.5 -0.1 5.3 5.26 -0.04
Crisil Balanced Fund Index 0.1 10.7 4.5 7.7 3.43 -0.01
Returns above 1-yr are compounded annualised
NAV Data as on June 24, 2013
(Source: ACE MF, PersonalFN Research)

For purpose of comparison we classified children's benefit funds in two categories viz. equity oriented and debt oriented funds. Equity oriented funds have a flexibility to hold 65% or more in equity and equity related instruments. While debt oriented funds are mandated to hold less than 35% in equity assets. Table above suggests that the performance of equity oriented children's benefit funds has been better than that of the broader market index, S&P BSE 200 over last 5 years. However, the category of debt oriented funds has failed to outperform Crisil Balanced Fund Index. It is noteworthy that both categories have been less volatile than their comparable indices. On the other hand average returns generated by the category of equity oriented balanced funds have been better than those of equity oriented children's benefit funds across most time horizons. Moreover, they have been less volatile in comparison.

PersonalFN believes investing merely in specialty funds doesn't help fulfill objectives. Same is true in case of children's benefit funds. Most of equity oriented children's benefit funds have underperformed balanced funds. Moreover, in principle, those who have a longer time horizon and moderate to high risk appetite may look at equity oriented balanced funds instead of locking money in debt oriented children's benefit funds. PersonalFN is of the view that, you shouldn't get carried away with the name of the fund and instead chalk out your financial plan and maintain your asset allocation. Plain diversified equity funds would also suffice in your objective of providing the best to your children.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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