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Spotlight-Debt Fund, Why pass the child fund?

Saving for your child's future is a brilliant idea. But choosing any one of the children funds may not be smart decision. Read more to check, why?

Saving for your child's future is a brilliant idea. But choosing any one of the children funds may not be smart decision. Read more to check, why?

Debt funds were in spotlight during the week. International rating agencies downgraded Indian currency rating from stable to negative. However, Indian bonds and the fixed income funds remained stable despite the move. On the contrary, we discovered that the net assets of fixed income funds took a big jump of 66%, adding Rs. 12,741 crore in the last four months to Rs. 31,851 crore on July '01. And they remain the top flavour.

But the lofty returns of recent past is not sustainable, as it's driven by special situations, negatively impacting the long-term return from these funds. First and foremost, the series of and likely interest rate cut has boosted the bond prices, hence the debt funds have gained in value. But the new money pouring into funds will yield lower return as price of bond realign to the prevailing interest rates. The returns from the category of debt funds have slowed down in recent weeks as hopes for an interest rate cut have started receding. And realistically, over a longer time frame, these bond funds will only deliver marginally superior returns than alternative fixed income options; ofcourse with higher tax efficiency and liquidity.

Children Funds: Most parents are terrorised by the rising cost of education, today. The estimated cost of studying medicine 15 years could be almost Rs. 20 lakh, based on today's cost and assuming 10% inflation. To cater to these needs, there are eight versions of children fund offered by various fund families.

At the core, children funds are nothing but a balanced or a debt fund offered as different plans depending on an investors time horizon. However, to orient this to a specific goal, the withdrawal or redemption from the fund is permitted on a child attaining a specific age, normally 18 years. These funds could be useful if you are sure of your savings indiscipline and you just want to stash some cash for your child anyway.

However, barring the lock-in period linked to a child's age, there is no remarkable difference between any other balanced or a debt fund and a children fund. Ofcourse, the lock-in period has its plus and minuses. The big advantage of the lock-in forces you to think long-term and enforces investment discipline. However, the disadvantage is that you can see your fund turn rotten year after year and helplessly cannot do anything about it. Moreover, if your child's goal is many years away, you just might consider an all equity fund may be better suited option than a balanced fund.

If you are committed to your goal and have the investment discipline, you can well create your own customised children fund. With a regular or a lump sum investment in a fund of your choice, you can avoid being constrained by a lock-in period. For a while, till these funds prove their mettle, it will be worthwhile to be in charge of you goals and savings yourself.

Fund Update: For the week ending August 10, 2001, the market lost 9.17 points (0.28%) on the Sensex and 27.30 points (1.73%) on BSE National Index. The top gainers were Dundee Taxsaver (+2.19%), JM Basic (+2.06%), Alliance Basic Industries (+1.97%) and Boinanza Exclusive (+1.44%). Technology and tech heavy equity funds were the key losers -- ING Growth Portfolio (-5.66%), Pioneer ITI Infotech (-5.66%), K Tech (-5.57%), UTI Software (-5.47%) and Pru ICICI Technology (-5.00%).