Find out whether the fund is equity, debt, or hybrid oriented.
‘Understand the portfolio composition and whether it suits your risk appetite and horizon.’
“Children’s funds have varied asset allocation patterns — equity, debt, and hybrid oriented — which the investor can choose from based on individual risk appetite and time horizon,” says Vishal Chopda, fund manager, UTI Asset Management Company.
The style of fund management also varies.
Says Sanjay Bembalkar, co-head-equity, Union MF: “Some peers run their funds in this category as balanced advantage fund, where the equity allocation varies over time, while some run it as an equity-savings fund, with lower equity allocation.
“We will run our fund as a pure equity fund, given the long horizon investors have in this category, and the need to beat education inflation, which averages around 10-11 per cent.”
These schemes come with a lock-in, which is either five years or until the child attains the age of 18, whichever is earlier.
Investments into these funds can be made from the parent, guardian or child’s account. “At the time of redemption, however, the child needs to have an account of their own and the money can only go into it,” says Bembalkar.
Longer-term calls possible
The lock-in allows fund managers to take calls that require more time to pay off, without worrying about redemption pressure. Investors get the benefit of compounding.
“Time is your ally,” says Nehal Mota, co-founder and chief executive officer, Finnovate.
Chopda adds that the lock in prevents parents from falling prey to the temptation to redeem the investment early. A labelled fund is known to offer some psychological benefits.
“The corpus usually does not get utilised for some other purpose,” says Bembalkar.
If the investor opts for a hybrid fund, he needs to make less effort.
“The fund manager handles the task of rebalancing the portfolio on the investor’s behalf,” says Arnav Pandya, founder, Moneyeduschool.
Nothing unique, barring lock-in
These funds do not have any unique features. “Other than the lock-in, they don’t have characteristics that other equity, debt or hybrid funds don’t possess,” says Pandya.
If the fund is hybrid oriented, the fund manager controls the asset allocation, which remains the same for all investors. It cannot be customised to meet an individual investor’s needs.
Mota points out that some investors may find the lock-in restrictive.
Should you invest?
Investors who tend to exit funds during periods of high volatility may go for them. They will find the lock-in useful.
Says Pandya: “People who fear they may use up the corpus created for their child may also opt for these labelled funds.”
Investors who can develop a diversified portfolio and rebalance it periodically (themselves or with an advisor’s help) need not opt for these funds.
With separate funds, they would have greater control over the asset mix: they could, for instance, reduce the equity allocation as they get closer to their goal.
Points to check
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Find out whether the fund is equity, debt, or hybrid oriented. “Understand the portfolio composition and whether it suits your risk appetite and horizon,” says Pandya.
Since the nature of funds within this category varies widely, assess the performance of each against its appropriate benchmark, not the category average.
Mota suggests checking the fund’s expense ratio. It varies widely. In direct plans, it ranges from 0.66 per cent to 2.17 per cent while in regular plans it ranges from 1.2 per cent to 2.6 per cent. Avoid overpaying.
Pandya suggests checking past performance and fund manager churn (too much is disruptive for the fund management process).
Chopda advises using the systematic investment plan route and starting early to get the benefit of compounding.
While the minimum investment horizon must be five years, it should be seven years or more in an equity-oriented plan.
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Feature Presentation: Ashish Narsale/Rediff.com
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