Mutual Funds

Fund Query: What are the investment options with high returns, for children?

Parvatha Vardhini C BL Research Bureau | Updated on August 21, 2021

I am planning to invest a lump sum in the name of my grandchild such that it is available for her higher studies when she is 16. She is now one year old. Could you suggest an instrument that can give cumulative return with a CAGR of at least 12-15 per cent? I am willing to take medium risk for this investment.

Soundarrajan

Avenues available specifically for saving for children are the Sukanya Samriddhi Account (SSA) for girl children offered by the post office as well as solution oriented schemes (children’s funds) from mutual funds for both genders.

Under SSA, a guardian can open an account in the name of a girl child aged below 10. Deposit can be made up to completion of 15 years from the date of opening. To keep the account active, a minimum deposit of ₹250 is to be made each year. The maximum allowed each year is ₹1.5 lakh. The account matures after 21 years from the date of account opening but withdrawals are allowed after the girl child passes Class X, subject to certain restrictions. SSA is a floating rate instrument and interest rates are fixed for every quarter for the corpus. The interest for the current quarter stands at 7.6 per cent. Although returns on post office schemes have become market-linked, more often than not, they offer a premium to market rates.

The advantage with SSA is that it is very safe as it has sovereign guarantee. It also enjoys ‘EEE’ taxation benefit — initial investment up to ₹1.5 lakh is exempt under Section 80C; interest and maturity proceeds are also tax-exempt.

Children’s funds from MFs are also another option for grandparents. Fund houses such as UTI, SBI, ICICI, HDFC, LIC, Axis, Tata and Aditya Birla offer these funds.

These schemes have a lock-in for five years or until the child attains majority, whichever is earlier. The investment strategies of these schemes vary. While some, such as UTI Children’s Career Fund – Investment plan, Tata Young Citizens and Aditya Birla Bal Bavishya Yojana, follow an equity-oriented strategy, many others such as HDFC Children’s Gift, ICICI Pru Child Care Gift, SBI Magnum Children’s Benefit - Investment Plan follow an aggressive hybrid strategy. There are children’s funds that follow conservative hybrid and balanced hybrid strategies too.

Since you have an appetite for medium risk, aggressive hybrid funds which invest up to 35 per cent in debt instruments may be a good fit. In this category, HDFC Children’s Gift fund, with a track record since 2001, sports an annualized return of 14.6 per cent for the regular plan over the last 15 years, followed by ICICI Pru Child Care Gift at 11.9 per cent. The HDFC fund is a topper across all strategies for this 15-year period.

That said, there are a few things to note before you make the decision:

One, if you are particular about putting in a lump sum higher than ₹1.5 lakh now, mutual funds may suit you better as SSY has a ceiling and it requires repeated investments each year, though minimal. However, to save for children, it is not necessary that you should invest only in children’s funds. You can also choose from other normal fund categories based on the performance of the funds as well as your risk appetite.

Secondly, while it is difficult to calculate the CAGR returns in SSA considering that interest rates are reset every quarter, the EEE nature of the product as well as its risk-free status is a big draw. Mutual funds come with market risk and it is only the long time period for the investment that brings down the risk of capital erosion or the risk of sub-par returns. Past returns are also not indicative of future. Markets are at a high at present and a sharp/prolonged correction cannot be ruled out. Hence, you must be willing to see your investments dwindle before they start compounding. Also, capital gains tax will be applicable for MFs when cashing out.

Send your queries to mf@thehindu.co.in

Published on August 21, 2021

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