Mutual funds are the most sought-after investment avenues to achieve long-term financial goals. Children’s plans that fall under the solution-oriented schemes category seek to specifically help you set-aside funds to meet your child’s future needs.
Children’s funds are open-ended schemes with a lock-in period of at least five years or till the child attains the age of majority (whichever is earlier).
The mandatory lock-in helps you stay invested for a long period of time, and build a tidy corpus to meet your child’s education and other long-term goals.
These funds allow investment only in the name of a minor child — less than 18 years old. Payments can be made only from the bank account of the minor or from a joint account of the minor and the guardian.
Note that unlike equity-linked savings schemes (ELSS) (with a three-year lock-in) that are eligible for tax benefit under Section 80C of the Income Tax Act, children’s funds do not offer any tax benefit, despite the compulsory lock-in.
SBI Magnum Children’s Benefit Fund - Investment Plan is a new addition to the children’s fund category. The new fund offer closes on September 22.
SBI Mutual Fund already has a children’s plan, called SBI Magnum Children’s Benefit Fund - Savings Plan, which is a debt-oriented hybrid fund.
All the children’s funds in the market currently are hybrid funds — either an aggressive hybrid fund (invests 65-100 per cent in equity) or a debt-oriented fund (invests 20-40 per cent in equity). The NFO will be an equity-oriented hybrid scheme that invests 65-100 per cent in equity.
There are currently eight fund houses offering nine children’s plans, with two (SBI Children’s Savings and UTI Children’s Career Fund (CCF) - Savings Plan) falling in the debt-oriented category; the rest invests predominantly in equity.
The pitch often used to draw investors to children’s funds is that the compulsory lock-in helps create wealth for the long term.
Given that one needs to set up dedicated funds for children’s future needs, a mandatory lock-in ensures that one does not dip into this kitty in case of short-term emergencies. Also, if you invest early on, through SIPs (systematic investment plans), you can mitigate the volatility in returns and create wealth over the long term.
But this holds true even if you invest regularly, with a similar discipline, in top-performing funds of other categories.
Hence, you may not necessarily require to invest in children’s plans to meet your goals.
But the performance of the existing funds in the category has been notable. Over one-, three- and five-year periods, the top-performing funds have delivered on-par or higher returns than the broader Nifty 50 TRI. The category returns beat that of equity large-cap funds across time periods and are also comparable to the performance of multi-cap funds.
Over a five-year period, funds such as HDFC Children’s Gift Fund - Investment Plan, ICICI Prudential Child Care Fund - Gift Plan and UTI CCF - Investment Plan have delivered 7-9 per cent returns.
SBI Magnum Children Benefit Fund - Savings Plan, a debt-oriented fund investing 20-25 per cent in equity over the past three years, has also delivered higher returns of 10.3 per cent over a five-year period, trumping Nifty 50 TRI returns of 9.5 per cent.
On the equity side, children’s funds normally follow a multi-cap approach.
SBI Magnum Children’s Benefit Fund - Investment Plan will invest 65-100 per cent in equity across market caps.
The debt portion will be invested in high-credit-quality portfolio with a short- to medium-duration profile, mitigating both credit and interest-rate risks.
The scheme may also allocate up to to 20 per cent in gold. The fund manager may also take exposure of up to 35 per cent of the net assets in foreign securities.