Today, parents are bombarded with many investment options to plan for their children’s future. In insurance, you will find specific child insurance schemes. They are similar to traditional insurance policies which provide life cover and time frame for maturity. In banking, you will find savings account options for kids. Likewise, there are also dedicated mutual fund schemes to plan for a child’s future. They aren’t difficult to identify as the scheme is likely to have the term – child or children or young – in the name itself.
Do these dedicated solution-oriented mutual fund schemes fulfil the important objective of planning a corpus for your child’s education?
Let us look at their features first:
Mutual fund child care plans come with a 5-year lock in period or till the age of 18 years, whichever is earlier. The money needs to be invested in the child’s name, who will be a minor investor. When the child completes 18 years of age, it will reflect in the status of the fund.
Most mutual fund child care plans are hybrid plans, i.e., they invest in a combination of debt (fixed income) and equity (stocks). Let us examine their features in the table below:
Mutual Fund Child Plan Features Source: Fund Factsheet, Morningstar
There are in all 8 fund houses who are offering child care plans. Of these, the largest 2 funds in this category, UTI and HDFC plans have a sizeable asset size of over Rs.3,000 crores while the rest are small. As you can observe from the table, most of mutual fund child care plans are hybrid plans, i.e., they invest in a combination of debt and equity. Barring UTI and SBI, most other funds have aggressive equity allocation of at least 60 per cent. These are no different from other regular hybrid plans, i.e., balanced funds. Although the returns vary depending upon their allocation to equity and debt, many of these child care plans have the volatility like the regular hybrid plans.
When you are planning a corpus for your child’s education, you should consider a longer time horizon of at least 8-10 years. In that context, the 5-year lock-in period built into the structure of child plans is not adequate enough. Further, with a longer time horizon, slightly greater risk can be taken in a 100 per cent pure equity fund rather than a hybrid fund such as a child plan. It is likely to give your child education kitty the much-needed booster than a balanced fund. When the goal is nearing, around 2-3 years away, you can fully shift to a debt fund for safety.
With education costs shooting up year-on-year, the longer investment horizon is very crucial in accumulating a decent corpus. Except for the word child in the fund name, mutual fund child care plans are no different or exceptional to help you achieve your child education goal. It is better to keep your investment approach simple rather than investing in hybrid plans. You can consult a professional financial advisor who will help you in making informed decisions with the right rationale rather than out of emotion associated with child-oriented financial products.