Mutual Fund investment options for children

Conventionally when thought about a child’s future the planning involves their education and marriage. The traditional mindset is to invest in physical assets like real estate and gold, especially if the child is a girl.

The other typical form of investing for the child particularly as a gift at the time of birth is through a bank fixed deposit which is mostly reinstated once the maturity happens. This is continued till the need is arrived. Another form is the consideration of life insurance though this is a recurring investment and is usually self-driven and rarely gifted i.e., a grandparent or relative continues to fund for the renewal premiums.

Typically, the tendency to invest in gold/physical asset is directly proportional to the marriage need. The rationale behind such decisions being that the property value will appreciate over a long period and could be liquidated to fulfil the requirement or gold could be either pledged, sold or made as ornaments for the wedding. 

While these long-term large needs are planned in the above means, most short-term expenses are met through the current income and are not budgeted accordingly. Most often, these are unplanned and some pop-up like coaching classes for sports/art, additional private tuition, class/school tours and some other extracurricular activities. But, these seemingly innocuous needs turn expensive upsetting the household budgets. 

Planning for child, however, starts from covering the basic requirement of security and that could be done through a term life insurance. Of course, a child insurance plan provides a double benefit i.e. sum assured at an event of death of the parent and again maturity or pre-defined milestone-based inflows. But one can’t be too skewed towards insurance and insurance heavy doesn’t hold well, so a combination of term and child plan could add value. 

A better variant could be a Unit Linked Insurance Plan (ULIP) though the lack of higher insurance cover could be a spoiler. The other way is to ensure the security i.e. by opting a higher sum assured and/or equal to the need amount (today’s date) and the rest to be invested separately. 

What we are witnessing is an explosion of education costs and the general inflation seems to be a lesser factor to discount. This hence, becomes a crucial consideration i.e. a higher compounding factor for arriving at the cost of education. This helps one to be less deviant from the actual costs at the time of need.

Mutual funds (MF) could be an ideal mix considering the longer-term duration of the need and also the availability of liquidity in-between unlike some of the traditional forms of investments. But, for investors who are not comfortable to invest completely into equity related securities, they could consider specific MFs for child needs. These are nothing but open-ended hybrid equity funds with some deterrence involved.

The restriction is a lock-in for 5 years from the time of investment so that the fund is to ensure a discipline and also to create sanctity to the investment committed for the investment goal. However,there are two variants in these child plans offered by various fund houses.

The variation is based on asset allocation and accordingly classified in the Hybrid category of MF being either aggressive or conservative. Funds where majority of the investment is debt i.e. more than 60 per cent, would be considered as hybrid debt and hence conservative funds. 

These child plans predominantly invest in debt and related investments with a little exposure to equity ranging up to 25 per cent. Investors with moderate risk appetite could consider these funds, for example, SBI Magnum Children’s Benefit Fund operates in this sphere.

The other variation is an aggressive fund category where the asset allocation is predominantly in equity and related instruments. In these funds, the equity allocation is upwards of 60 per cent and goes up to 80 per cent while the rest is invested in debt instruments.

For instance, funds like ICICI Pru Child Care Plan (Gift plan), HDFC Children’s Gift Plan or UTI Children’s Career Plan and Tata Young Citizen’s Fund. Conversely could be explored with Axis Children’s Gift Fund which has a moderate equity asset allocation between 40 per cent and 60 per cent. The rest is invested in debt market and cash-futures arbitrage. 

Of course, equity exposure ensures the fund performance over 10 years and above; puts at way-above the traditional investments of bank deposits or other physical avenues. The returns are in the range of higher 10’s for such durations. (The author is co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com)