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Mutual funds have been a preferred choice for investors looking for an investment solution to save towards their children’s future. Currently, eight asset-management companies (AMCs) offer children’s plans with various options, across equity and debt portfolios.
Falling under the solution-oriented category, children’s funds are open-ended schemes with a lock-in period of at least five years or till the child attains the age of majority (whichever is earlier). These funds are ideal for setting aside money for long-term targets. The compulsory lock-in helps create a corpus for the long haul.
Eight mutual fund companies — Aditya Birla Sun Life, Axis, HDFC, ICICI Prudential, LIC, SBI, Tata and UTI — offer schemes specially designed to help investors save for their children’s future expenses.
These funds allow investment only in the name of a minor child — less than 18 years old — on the date of investment. The applicant can be the parent, stepparent, grandparent, an adult relative or a friend. A few AMCs, including Aditya Birla, also allow trusts and corporate entities to invest in a child’s name. Though these schemes come with a lock-in of at least five years, they are not eligible for any tax deduction under Section 80C of the Income Tax Act.
Investors can consider the SIP (Systematic Investment Plan) route while investing in children’s plans. Thanks to steady investments in small doses, SIPs inculcate discipline in investing and reduce the risk of timing the market. SIPs also help the investor average their cost of purchase over a period of time.
Children’s funds follow the balanced approach by investing in a mix of equity and debt instruments. The schemes are either aggressive hybrid funds that invest predominantly, say, 65-100 per cent in equities, or debt-oriented hybrid funds that allocate 15-40 per cent to equity.
The rest of the money is invested in debt assets. In effect, plans with an equity orientation seek to cater to aggressive investors, while those with a debt orientation are for conservative investors.
ICICI Prudential Child Care - Gift, UTI CCF- Investment, HDFC Children’s Gift, LIC MF Children’s Gift, Axis Children’s Gift, Tata Young Citizens and Aditya Birla Sun Life Bal Bhavishya Yojna - Wealth follow the equity-oriented investment strategy, while UTI CCF Savings and SBI Magnum Children’s Benefit follow the debt-oriented approach.
Most children’s funds have a decent track record, with many doing quite well over the long term. Over a 10-year time-frame, a look at the SIP investments made in these schemes shows that HDFC Children’s Gift, ICICI Prudential Child Care Fund - Gift and SBI Magnum Children’s Benefit Plan have delivered matching or higher returns than that of NIFTY 50 - TRI. The current value of 10-year SIPs with a monthly installment of ₹10,000 in the above-mentioned schemes was ₹21.3-23.5 lakh while that of identical SIPs made in the NIFTY 50 - TRI was ₹21.3 lakh.
It is worth noting that SBI Magnum Children’s Benefit, a debt-oriented fund which allocates 20-26 per cent in equity, has outperformed many equity-oriented funds and generated similar returns to that of the NIFTY 50 - TRI, thanks to the efficiency of the fund manager in prudently allocating between equity and debt.
On the equity side, children’s funds follow a multi-cap approach and have a diversified portfolio of quality companies across sectors and market capitalisations. These funds invest mostly in large-cap stocks that have given steady returns across market conditions in the past. However, many funds have increased their allocation to mid caps during rallies to spice up returns.
On the debt side, most funds take active duration calls. However, considering the current uncertain interest-rate scenario, many funds now follow the accrual strategy. Allocation to lower rated AA and below debt papers has been relatively high in Axis Children’s Gift, SBI Magnum Children’s Benefit and UTI CCF - Savings, which may increase the credit risk in their debt portfolio.
It is to be pointed out that two of the funds — SBI Magnum Children’s Benefit and UTI CCF - Savings — were hit by the bond-rating downgrades and defaults in the recent bonds fiasco.
Any investment in theses funds by an applicant will be treated as a gift in favour of the beneficiary child in the year of investment. The income from the plan will be taxed as per the nature of mutual funds (equity-oriented or non-equity oriented) and clubbed with the income of the parent if it is encashed before the child turns 18.
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