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%
Equity
|
Debt
|
|
HDFC Children's Gift Fund
|
66.09%
|
27.00%
|
HDFC Equity Hybrid Fund
|
69.66%
|
28.42%
|
Difference
|
3.57%
|
1.42%
|
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
Equity
|
Debt
|
|
Axis Children's Gift Fund
|
69.06%
|
30.49%
|
Axis Equity Hybrid Fund
|
70.59%
|
29.38%
|
Difference
|
1.53%
|
1.11%
|
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:
- Do not let short term under-performance let the
alarm bells ringing
- 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.
