EXECUTIVE SUMMARY: Saving for child’s future is always a priority for parents. Be it for Education or Marriage, these goals are emotional. Most of the times one tries to save either in the form of FD or an Insurance Policy. This article explores child plans of Mutual Funds which are lesser known to public but can generate better returns.

Anurag and Anupriya were very happy when they were blessed with twins. Anurag’s relatives and his friends blessed the babies with lots of blessings, gifts and cash. His parents decided to keep some money in the name of children for their future. His father gave him a lump sum amount and asked him to take a good decision. Anurag friends suggested him to take insurance plan for children; some suggested to keep the money into FD’s. Confused, Anurag finally consulted an adviser who introduced him the Child Plans of Mutual Funds. Anurag was curious to know about the same and then finally decided to invest into mutual funds.

So what are the Child plans from Mutual Fund companies? How they are different from a normal equity or debt scheme. Let’s have a look on what Anurag learned from his advisor.

Mutual Funds Schemes for Children: The goal of child education and marriage are the most important goals in one’s life. Every couple starts planning for these goals as soon as child is born. Most of the times people end up buying insurance policy for their children which turns out to be a bad decision as the returns generated are not in tune with the inflation. Not many people know about the mutual fund schemes which are dedicated towards child’s future planning.

Most of the funds under this category are generally Equity oriented hybrid funds.  As these goals are planned early, there is a long period to save and for that pure equity or equity oriented hybrid funds are the best bet.  In this category, there are also few schemes which are debt oriented.  HDFC Chidlren Gift’s Fund is one of the fund which provide both equity and debt oriented funds.

How Child Plan are different from plain schemes: There are some features which make child plan look different from plain vanilla schemes.

1. Child plan have a longer lock in period. For instance one of the schemes has a lock in period of 3 years from investment date or 18 years of age whichever comes later.
2. Usually when someone invests in the name of children or grandchildren, third party declaration is required. However, for these schemes, no such declaration is required.
3. The redemption proceeds will be in the name of child. It does not matter who the contributor is. (Parents or Grand Parents)
4. The exit load charges are higher. Few plans charge as high as 4% to those who want to redeem before 4 years and few charge 1-2% even after 7 years.

Let’s have a look on the comparison of different schemes available as child plan.

Source: Value Express   Date: 16/07/2014

Should you invest into Child Plan of Mutual Fund?

Investing for the child’s future requires a lot of discipline. It is always said that only long term investing has created wealth and discipline is the one of the reason behind creation of wealth. And with the kind of features child plan has, anybody will think thrice before withdrawing the fund.
These plans are definitely better than any of the child insurance plans available and the benefit of compounding in mutual funds makes it more attractive. However, the pure equity fund for the longer period will definitely fetch more returns than any hybrid funds. So while making strategy for investment, one can include the plain equity fund into the portfolio with child plan for a long term goal.
As child plans invest major portion into equity, Investing through SIP (Systematically Investment Plan) is suggested as it helps in reducing the average cost and also helps you in enabling a disciplined participation in market through ups and down.
Vice versa, if the goal is of short term one can invest into debt oriented child plan, though with the recent change in the Debt MF Taxation, this will be more or less like Fixed Deposit for a tenure of < 3 years. Please remember, merely by investing into these special funds one cannot achieve the goal. One has to make strategy with the proper asset allocation then only the chance of reaching towards goal increases.

Avoid investing majorly into Child’s name: There is no doubt that one should invest in child’s name, however it should not be more than say 30-40% of the targeted amount. Child goals are of long term, nobody knows what would be their maturity at that age and if the amount is substantial, it may create a problem as child gets full control over the funds. So it’s generally recommended that parents invest majorly in their own name even for Child goals.

Teach them about Money: To educate you children about finance at an early age, try to engage them while filling the form and if big enough then let them fill it so that they get an idea about what they are doing and what for. Also, encourage them to watch money related videos such as IDFC One Idiot movie or Franklin Templeton Academy’s investor education videos.

The author can be reached at [email protected]