I have invested Rs 50,000 in two mutual fund schemes for children. What are the prospects for these kind of funds. Could you please tell me more about these schemes?
Ashok Singh, via e-mail
What is the idea behind investing in a child-related mutual scheme or any other such investment? Simple, to secure a child's future—save money for a child's higher education, marriage etc. And with the spiraling cost of education, your concerns are not misplaced. However, while financial goals are specific, investment avenues may not be.
Children's benefit funds—as they are usually called—have a hybrid character, with different equity-debt allocation. For instance, HDFC Children's Gift Fund has both a Savings Plan, which invests primarily in debt, and an Investment Plan, where the equity allocation can touch as high as 60 per cent. This balanced character helps in growth of investments with low volatility. That is because unlike pure equity funds where wild swings may cause some palpitation, a debt allocation in a hybrid fund, such as a children's fund, reduces volatility.
But one thing has to be kept in mind that children's funds are not meant for all. Their suitability depends on the age of the child at the time of investment. If your child is, say, five years old, the time horizon could be about 10-12 years. If your child is a teenager, the investment horizon could be three-four years. In the first case, routing your investments through children's funds means that you would need a lump sum amount at the end of the 10-12 year period. And since almost all children's funds levy a heavy exit load, pulling out investments would act as a disincentive. This lends discipline to investing, which is needed for long-term investments. In the second case though, knowing that the financial need is drawing to a close, you may not want to risk your investment by putting money in equities. In such a situation, any fixed income avenue—like an income fund or a bank fixed deposit—may serve your goal well.
Since most children's benefit funds were launched a year and a half ago, to draw comparison between children's funds would be slightly off the mark, as they do not have much of a track record. Nonetheless, the beauty of this product lies in its convenience. If you were to create your own customised child fund, by investing in equities or an equity fund and a portion in fixed income, it would be quite difficult to track them over the long term. On the other hand, children's funds rid you of that hassle.
But remember since these funds have not been around too long, you will have to watch their performance. If at any point you think that these investments are doing more harm than good, it would be time to jump ship.