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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. There are smarter ways to save for your child. Read to find more…

Education is the key to our futures. Most parents want their kids to take advantage of every possible educational opportunity. Today that means giving the children access to a computer and helping them learn how to navigate the Internet as well as giving them the opportunity to higher studies. But most parents are terrorised by the rising costs of education, which is fast emerging as a big business. The estimated cost of studying medicine 15 years hence could be almost Rs. 20 lakh, based on today's cost and assuming 10% inflation.

In recent times, mutual funds have realised the growing need to save for children's future and have devised their versions of children fund -- in all, seven of them offered by various fund families now. These include the HDFC Children Gift Fund, IDBI Child Benefit Fund, Magnum Child benefit Plan, Pioneer ITI Child Asset Plan, Prundetial-ICICI Child Care Plan, Tata Young Citizen's Fund and the UTI Children Gift Growth '99. In fact the realisation of this savings niche is very recent, as four of the seven funds have been launched this year itself.

What is a Child Fund? At the core, a children fund is nothing but a balanced or a debt fund offered as different plans depending on an investors time horizon. And to orient the savings for a child's need, the withdrawal or redemption from the fund is permitted when the child attains a specific age, normally 18 years. Some funds allow early withdrawal, but with a stiff exit load.

Children Funds: Uncaring?
  Fund  Liquidity Provision   Asset Allocation  Entry  Exit
  HDFC Children Gift Fund "After 3 yrs or on attaining maturity i.e. 18 yrs, whichever is later" "Savings Plan: Equity-0 to 20%, Debt-80 to 100%. Investment Plan: Equity-40 to 60%, Debt-40 to 60%" 1% Nil
  Pioneer ITI CAP Only on completing 18 yrs. Reinvested dividend in Educ. Plan allowed after 4 yrs of investment. "Education & Gift Plan: 100% in debt, 20% in MMI, 10% equity" NIL NIL
  Prundetial-ICICI Child Care  "No-lock in period, but high exit load on redemption within 3 yrs" "Study Plan: 85 to 100% in Debt, 0 to 15% in Equity. Gift Plan: 51-60% in Equity, 40-49% in Debt" "Study Plan-1.5%, Gift Plan-2.5%" "2.5% within 3yrs, 1.5% afterwards"
  Tata Young Citizen's Fund On completing 18 yrs "50% in Equity, 50% in debt, Money Market exposure can be 100%." 1% NIL
  IDBI Child Benefit Fund On expiry of the target period of 7/10 /15 yrs or earlier subject to a load 40-60% in Equity and Debt instruments. 1.90% "3% within 3yrs, 2% for next 5 yrs"
  Magnum Child benefit Plan  After 3 yrs of investment subject to load. Or on completion of 18 yrs "Debt - 80%, Equity - 20%" N.A N.A
  UTI Children Gift Growth '99 Open-ended fund with assured returns N.A N.A N.A

    Why not to invest in a 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.

First and foremost, they lack novelty. The different thing about a child fund is its name, which has a strong emotional appeal and the lock-in period linked to a child's age. And if you are committed to your goal and you also have the investment discipline, you can well create your own customised children fund with any balanced, debt or equity fund of your choice. With a regular or a lump sum investment in a fund of your choice, you can avoid being constrained by a lock-in period.

The lock-in period is a deterring constraint. The disadvantage is that you can see your fund turn rotten year after year and you will be helpless, as you cannot do anything about it. Ofcourse, the lock-in period has its plus as well. A lock-in enforces long-term thinking and investment discipline.

Finally, a straight jacket child fund may not be right for your child's age. If your child's goal is many years away, you just might consider an all equity fund to be a better option than a balanced fund. If your child is about to begin his college, it will be prudent to be fully in a cash fund.

What to do?Proper planning for a child's need is essential. And the right approach to savings for child will depend on how old the child is and when you begin. Obviously, the earlier you begin, the more effectively time can work for you. And the best time to start a regular monthly investment plan is when your child is an infant.

The important thing to remember about a child saving's program is to change your investment mix as the child grows. You should gradually shift to more conservative assets when the child gets closer to the financial need because there will be less time to recoup any losses. Eventually, by the time you reach the stage when you need money, you should ideally own nothing but cash funds or may be money in your bank. And all these can be achieved with your choice of the large number of plain vanilla equity, balanced, debt or cash funds available today. Now you can easily pass the child fund.