Child care through mutual funds

Fund houses have balanced schemes and monthly income plans to cater to children's long-term needs.

Parents often seek the best way to save for their children. And aggressive advertising can confuse them. There are various insurance schemes, namely child plans, in the market. Also, many fund houses have schemes that cater specifically to this need.

UTI Mutual Fund, Tata Mutual Fund and Franklin Templeton Asset Management have been running schemes catering to financial planning for children for over a decade.

Such schemes offered by mutual funds are similar to either balanced funds or monthly income plans (MIPs). Being low-cost investment instruments compared to pure insurance products, these made more financial sense for child planning, said financial planners.

“Compared to an insurance product, they work out to be more cost-efficient,” said Malhar Majumder, a certified financial planner. He added, “Though diversified equity funds are the best option for any long-term goal, these schemes suit investors who keep moving in and out of mutual fund based on market conditions. Investing for children creates a psychological hurdle that prevents parents from either breaking the investments or switching.”

“That is why we accept applications only in the name of a child. This further deters parents from utilising this money for other purposes,” said Ranen Gandhi, head (products), ICICI Prudential Mutual Fund.

Structure
Most of the equity-oriented plans in this category are balanced funds. This helps in automatic rebalancing of equity and debt and even reduces the risk of volatility.

There are around six equity-oriented schemes, including ICICI Pru Child Care (Gift), HDFC Children's Gift (Investment), Principal Child Benefit SS-Career Builder, UTI CCP Advantage, Templeton India CAP Gift and LICMF Children Fund. Except for ICICI Prudential, which has a customised index, all the funds have Crisil Balanced as their benchmark.

However, asset allocation between equity and debt differs from fund-to-fund. For example, though UTI CCP Advantage is a balanced fund, it has the mandate to invest in equity up to 100 per cent and up to 35 per cent in debt. HDFC Children's Gift's (Investment) equity allocation can range from 40 to 75 per cent and debt allocation from 25 to 60 per cent.

Equity allocation of over 65 per cent makes these funds more tax-efficient. There is no long-term capital gains tax for the unitholder if the fund maintains equity allocation at 65 per cent of the overall corpus.

Within debt, there are six funds, including ICICI Pru Child Care (Study), UTI CCP Balanced, HDFC Children's Gift (Savings), Magnum Children's Benefit Plan, Templeton India CAP Education and Tata Young Citizens.

The equity-oriented schemes were suitable for children under 13, as equity investment required long-term investments, said financial planners. Later, one can move the money into debt-oriented plans through a systematic withdrawal plan, as you get closer to your financial goal.

A person investing in these schemes can also opt for lock-in. For example, HDFC Mutual Fund offers a lock-in for both its funds. If a person opts for this option, the money cannot be redeemed until the child attains 18 years or until each investment completes three years, whichever is later.

Insurance
Some of these schemes also offer insurance cover. These include ICICI Prudential and Tata Mutual Fund. However, this is a personal accident insurance cover. Between the two, ICICI Prudential covers one parent for Rs 5 lakh or 10 times the units held, whichever is lower. Tata Mutual Fund covers a child for personal accident for Rs 1.5 lakh, as per the scheme's information document. “This cover is of little use to the investor. Such a product is available at a small cost elsewhere. What a parent requires is life insurance,”said Majumder.

Even for accident insurance, there would be many clauses and caveats. An investor should first gain clarity on insurance before relying on it.

Performance
In the past one year, ICICI Prudential ChildCare Gift (97.84 per cent), HDFC Children's Gift (Investment) (66.91 per cent) and Principal Child Benefit (59.80 per cent) are among the top 10 balanced funds by returns. In the debt-oriented category, ICICI Prudential ChildCare Study (25.62 per cent), UTI CCP Balanced (27.59 per cent), Tata Young Citizens (38.43 per cent) are among the top 10 schemes by returns.
 

AT A GLANCE
Schemes (Equity-Oriented)	5-Year	3-Year	1-Year	Equity	Debt	Benchmark	Net Assets (Rs Cr)
ICICI Pru Child Care-Gift	19.22	11.53	97.84	65-100	0-35	50% mid-cap & 50% small-cap	153.93
HDFC Children's Gift Inv	15.97	12.22	66.91	40-75	25-60	Crisil Balanced	225.57
Principal Child Benefit  SS-Career Builder	23.46	14.65	59.80	65-75	25-35	Crisil Balanced	30.13
UTI CCP Advantage-G	9.06	11.61	44.91	70-100	0-35	Crisil Balanced	48
Templeton India CAP Gift-G	-	9.86	44.71	40-75	25-60	Crisil Balanced	6.7
LICMF Children Fund-G	-	-11.42	39.36	0-70	0-100	Crisil Balanced	7
Tata Young Citizens	14.17	8.99	38.43	0-50	0-50	Crisil Balanced	175.83
Schemes (Debt-Oriented)
ICICI Pru Child Care-Study	12.68	10.65	25.62	0-25	75-100	Crisil MIP BI	30.97
UTI CCP Balanced	11.88	9.27	27.59	0-40	60-100	Crisil H 60:40	2,780.52
HDFC Children's Gift Sav	9.56	12.24	22.84	0-20	80-100	Crisil MIP BI	60.11
Magnum Children's Benefit Plan	8.83	7.44	15.09	0-25	0-75	Crisil MIP BI	21.84
Templeton India CAP Education	8.22	6.21	12.14	0-20	80-100	Crisil MIP BI	1.42
Source: Value Research; Returns as on April 23

“We get long-term money and only from retail investors, that's why the corpus of such scheme is small. However, this helps to construct the portfolio accordingly. Most of the funds in this category are consistent, if not star performers,” said Gandhi.

Investments
When planning for a child's future, a person should always keep adequate insurance, said financial planners. Without relying on insurance bundled with the scheme, a parent should take a low-cost term plan that covers the child in case of death of the parent.