Investing in Mutual Funds for your children

Investing in Mutual Funds for your child’s future is no more a choice but has rather become a necessity considering the following reasons:

    > Ability of Mutual Funds to beat inflation over a long time horizon

    > Rising education inflation

   > Inability of other investment avenues to beat inflation in the long  run

    > Difficulty in coming up with a large amount together as opposed to accumulating over a period of time

Poor planning has repercussions that can be felt beyond generations and thereby it is imperative you invest after carefully considering various factors to avoid the impending disaster.

When you invest in Mutual Funds you usually look at the category of the funds you have invested in. This gives you an idea as to whether you possess the risk appetite to invest in the funds or no.

Another reason why this is important is because it helps you understand how concentrated or over diversified your portfolio is. Either case is detrimental to long term success.

Click Here to learn further about how to diversify your mutual fund portfolio.

When it comes to ‘solution’ based funds though, investors often find themselves deserted while trying to unravel as to what exactly the strategy of the fund is when it comes to growth and downside protection.

As surprising as this may sound, there’s nothing out of the box or ‘unique’ about solution funds like children’s mutual funds or retirement mutual funds.

They are basically hybrid funds (mostly aggressive) disguised as children or retirement specific.

Which Mutual Fund is best for child education?

This is a very common question going around and will continue to be so. In order to better understand how to go about this, first let’s try and analyze what should you not be doing to reach your desired objective.

Stay away from Mutual Fund schemes that claim to be the one stop solution for your child’s future. These products are given what is usually called in the world of advertising as ‘emotional appeal’.

Every parent wants the best for his/her child and thereby is more likely to invest in something that claims to solve every issue their child may face in the future. 

You invest not on the basis of sound financial judgment but rather on the emotional chords that are being strung involving your child.

Now let’s try and understand why most ‘Children Mutual Funds’ out there are merely a self-sabotaging exercise using the examples of various popular mutual funds out there for children.

HDFC Children’s Gift Fund
Fund Manager: Mr. Chirag Setalvad & Mr. Amar Kalkundrikar

Category: Solution

Date of Inception: 2nd March 2001

Benchmark: Nifty 50 Hybrid Composite Debt 65:35 Index

Lock in: Yes, for 5 years

As on 31st August 2019, the fund has the following bifurcation.

Equity: 66.09%

Debt:   27.00%

Cash & Cash Equivalent: 6.91%

Now let’s look at another ‘Aggressive Hybrid’ fund from HDFC Mutual Fund.

HDFC Equity Hybrid Fund

As on 31st August 2019, the fund has the following bifurcation.

Equity: 69.66%

Debt:   28.42%

Cash & Cash Equivalent: 1.92%

HDFC Children's Gift Fund
HDFC Equity Hybrid Fund

Axis Children’s Gift Fund
Fund Manager: Mr. Ashish Naik & Mr. R. Sivakumar

Category: Solution

Date of Inception: 2nd March 2001

Benchmark: Nifty 50 Hybrid Composite Debt 65:35 Index

Lock in: Yes, for 5 years

As on 31st August 2019, the fund has the following bifurcation.

Equity: 69.06%

Debt:   30.49%

Now let’s look at another ‘Aggressive Hybrid’ fund from Axis Mutual Fund.

Axis Equity Hybrid Fund

As on 31st August 2019, the fund has the following bifurcation.

Equity: 70.59%

Debt:   29.38%

Now let’s try and understand the difference between the two

Axis Children's Gift Fund
Axis Equity Hybrid Fund

As can be seen from the above table, there’s not much to choose between the two ‘aggressive’ schemes as far as strategy is concerned.

You could have rather merely held onto to the scheme without any lock in option and could have still availed the same strategy that you would otherwise with the Children specific fund.

SBI Magnum Children’s Benefit Fund
Fund Manager: Mr. Rajeev Radhakrishnan

Category: Solution

Date of Inception: 21st February 2002

Benchmark: Nifty 50 Hybrid Composite Debt 15:85 Index

Lock in: Yes, for 5 years

This is an interesting fund but for all the wrong reasons as the image below would magnify.

As can be seen from the image, the fund is more invested in debt as compared to equity and the reason for the same is because it is a Conservative Hybrid Fund as opposed to Axis Children’s Gift Fund and HDFC Children’s Gift Fund which are Aggressive Hybrid Funds.

Why SBI Magnum Children’s Benefit Fund is a poor deal?
     > It has more exposure to debt as compared to equity

   > It is a conservative hybrid fund despite it being for a long term horizon

    > It has a lock in period of 5 years when there are open ended funds with the same or similar strategy.

The fund falls behind on so many factors that it comes as no surprise that despite it being launched on 21st February 2002, it has only been able to accumulate a corpus of Rs. 62 cr as on 31st August 2019.

The basic idea of investing for your child is to have growth over a long term period that possesses the ability to beat inflation, if not then you are merely experimenting with your hard earned money that defies logic.

Keep in mind that education inflation rises at a much faster pace as compared to general inflation, so you cannot look at only growth but rather growth that beats inflation.

There’s no better option to beat inflation in the long run as equities, this is why having a Conservative Hybrid Fund for such a long term period makes little to no sense. 

Of course, you could always argue it to be a portion of your overall portfolio but then again it brings up the same point of having a close ended fund when you can also look for an open ended fund with the same strategy.

How to invest in Mutual Funds for your children?

Earlier we read the possible pitfalls to avoid when investing for your children, now let’s study how to plan investments in Mutual Funds for your children.

Mutual Funds risk appetite
This goes without saying but having a plan is paramount and not following it suicidal.

You would have to factor in the following points when making a plan:
    > Time Horizon
    > Amount to invest
    > Amount to achieve
    > Risk profile etc.

Sticking to pure debt funds or funds that are heavily skewed towards debt are futile when it comes to beating inflation but even investing in equity funds has its fair share of challenges.

It’s a common misconception that a longer time horizon (10 years or more) by default would allow you to invest in aggressive funds, it’s one thing being able to invest in these funds but it is a completely different thing to be able to go through long periods of market lows being inactive.

You need to be able to strike the right balance between growth derived from long term equity investing but at the same time resisting the temptation to redeem when the markets see a correction.

This is personal and not general, what works for you may not work for your neighbour and so on.

Therefore having a frank and honest conversation with your adviser is the only way out.

How to track my mutual fund portfolio?

Now that you have started to invest, the next task to accomplish is how to review your portfolio.

A couple of pointers regarding the same:

  1.     Do not let short term under-performance let the alarm bells ringing
  2.     Be on the lookout for any changes in the fund that would directly or indirectly have an impact on your portfolio

These could include any of the following
       >   Change in fund manager
      >   Change in category of scheme
   > Constant under-performance of the fund over several quarters when compared to its benchmark.

Keep in mind though that had you invested in any of the so called ‘Children’ specific schemes as mentioned above, you would not be able to make any changes since they all come in with a lock in period of 5 years.

When to redeem your mutual fund investments?

This is probably right up there with some of the most under-rated points that are rarely or never accounted for when it comes to mutual fund investing.

Let’s try and understand this with the help of a hypothetical scenario.

Imagine it’s 2008 and it is the same year you had to redeem your mutual fund investments since you are left with no choice.

You redeem your investments since that very year you need to pay fees for your child’s higher education which for obvious reasons cannot be postponed.

You are left with no choice but to redeem your investments at a loss, may be even 50% below your invested amount.

In such a scenario, the overall exercise that included careful planning, regular reviewing, etc. becomes redundant.

So what should you have done ideally?
When it comes to goal specific investments, make sure you have studied beforehand how long you will invest, how long you will stay invested and the mode of investment (lumpsum or SIP or both)

Now whatever the year you would be requiring the money, make sure you plan it such a manner that you would be redeeming your investments at least 2 years before.

This would also give you a better picture of the amount you actually need to invest.

Successful investing in mutual funds is not about never being in the red, being up or down does not determine the fate of a mutual fund scheme. What separates the successful investor from the unsuccessful one is the ability to plan, avoid outside noise and sticking to the plan.

Making money is difficult but making it last trumps that as far as difficulty is concerned.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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