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Are Mutual Fund child care plans worth your while?

A handful of asset managers have specific mutual fund schemes targeted for your child’s higher education goal. What is different about these schemes and do they work when it comes to fulfilling this all-important financial objective? Here are some details to help you arrive at the answer.

A handful of asset managers have specific mutual fund schemes targeted for your child’s higher education goal. These aren’t too hard to identify as the scheme is likely to have the term - child or children or young or ‘Bal’ - in the name itself. 

What is different about these schemes and do they work when it comes to fulfilling this all-important financial objective? Here are some details to help you arrive at the answer. 

Features

MF child care or children’s gift or young adult (and so on) plans are designed specifically to cater to long term financial needs around children’s education that arise after secondary school. As a result, these schemes come with a minimum 5-year lock in or till the age of 18 years (of the child) whichever is earlier. You will have to invest in your child’s name, who is a minor investor. When your child completes 18 years of age, the status on the fund will change to reflect that. 

The portfolio characteristics of these plans differ. While most schemes are managed as hybrid portfolios with a mix of debt and equity, there are a few that have an 80%-90% exposure to equities. Expense ratios are mostly in the range of 2.2%-2.5% and some schemes have an exit load along with the lock in. 

Ultimately, what you want from your investment is efficient return to match your goal. A quick look at long term performance of these schemes shows a great degree of variance. Five-year annualised return across nine such funds ranges from 6% to around 11% and the 10-year annualised return is in the range of 6% to 16%. The five-year average annualised return in the hybrid (aggressive) funds category is slightly above 9% and the same for a 10-year period is around 12%. 

What’s the benefit?

One clear benefit is the lock in embedded in the structure of the product. You are not able to withdraw or redeem your money before you actually need it for the goal. In the least, you have to remain invested for 5 years, which is a fair horizon for equity investments. Secondly, the portfolio turnover or the amount of buying and selling in the portfolio is low for most of the schemes. This could be an outcome of the lock in, but shows that fund managers can have long term, high conviction portfolios in these plans. 

Does it translate to return advantage?

Ultimately, what you want from your investment is efficient return to match your goal. A quick look at long term performance of these schemes shows a great degree of variance. Five-year annualised return across nine such funds ranges from 6% to around 11% and the 10-year annualised return is in the range of 6% to 16%. The five-year average annualised return in the hybrid (aggressive) funds category is slightly above 9% and the same for a 10-year period is around 12%. 

It seems accurate to say that there is no return advantage as compared to hybrid (aggressive) schemes. It may be a better idea to have an advisor hand hold you through the goal, help you pick good equity and debt funds based on your asset allocation preference and at the same time help you build the conviction to remain invested for long periods of 5 years and above.

The long-term investment horizon for this goal is just as important as the asset allocation and scheme selection, however, building it into the structure of the product itself (as is the case for MF child plans), doesn’t seem to bear any additional return advantage.

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