The future of our children is probably the biggest concern for most parents. Many parents start saving for their children’s education and marriage, soon after the child is born. This is, of course, the right thing to do, because the parents can benefit from power of compounding while the child is growing up. As far as investment choices for their children are concerned Indian parents are mostly conservative.
Risk and return in equity investing
Mutual funds are subject to market risks. The net asset value (NAV) of your mutual fund investment goes up or down on a daily basis. This is also known as volatility. But should you worry about daily volatility, if you are a long term investor? Over the last 20 years, the Sensex has given an annualised return of 17.8%, despite through big crash in 2008.
For parents who want to save for their children’s education or marriage, mutual fund is the best investment option. Since children’s education or marriage is a long term financial objective, like retirement planning, it is important to note the following from a financial planning perspective.
Child Plans offered by Mutual Funds :
Equity Oriented Child Plans:
HDFC Children’s Gift Fund Investment Plan:
This scheme was launched in 2001 and has over Rs 1462 crores assets under management (AUM). This scheme is clearly the best performing amongst the child plans. It is predominantly equity oriented in its portfolio mix. Equities comprise nearly 71% of the portfolio, while debt and cash equivalents account for 13% and 16% respectively
UTI Children’s Career Plan Advantage Fund:
This scheme launched in 2004, has nearly Rs 171 crores AUM. It has largely an equity bias, with equities comprising 93% of the portfolio mix. Debt accounts for 4% and cash equivalents 3% of the portfolio holdings.
Debt Oriented Child Plans:
In addition to equity oriented child plans, debt oriented child plans are also available in the market. These plans have a more conservative portfolio mix and are suitable for investors with moderate risk profiles and time horizons.
ICICI Prudential Child Care Plan – Study Plan:
This scheme was launched in 2001 and has Rs 80 crores of AUM. The portfolio mix is weighted to debt, with equities comprising only 24%, debt 73% and cash equivalents 3%. The quality of the debt portfolio is good, comprising of G-Secs and highly rated corporate bonds
Tata Young Citizens Fund:
This is one of the oldest child plans, launched in 1995. It has nearly Rs 180 crores of AUM. This fund has a slightly higher allocation to equities compared to its peers. Equity accounts for 49% of the portfolio mix, while fixed income securities (debt and money market) comprise about 44% of portfolio value. The balance is in cash equivalents.
HDFC Children’s Gift Fund Savings Plan:
This scheme, launched in 2001, has Rs 103 crores of AUM. In terms of portfolio composition debt is 51%, equity 19% and cash equivalents in close to 30%. The quality of the debt portfolio is good, comprising of G-Secs and highly rated corporate bonds
SBI Magnum Children Benefit Plan:
Thus scheme was launched in 2002 and has AUM base on Rs 38 crores. In terms of portfolio mix, equity comprises 24%, while fixed income securities (debt and money market) 74% of the portfolio, with debt accounting for 48%. The balance is in cash equivalents.
Investors invested in equity oriented child plan (e.g. HDFC Children’s Gift Fund Investment Plan) can switch to debt oriented plan (e.g. HDFC Children’s Gift Fund Savings Plan) as they start approaching their children’s education or marriage goals.
Mutual funds are ideal investment options for planning your children’s futures.
We have seen that equity is the best long term investment choice for your children. As such good equity mutual funds through systematic investment plans (SIPs) are ideal investment options for your children as they are growing up. Long term capital gains in equity funds are tax free. You can even save taxes under Section 80C by investing in Equity Linked Savings Schemes (ELSS).