Mutual funds: What are children-oriented MF schemes? Check details, returns for top 5 funds

Children's mutual funds: As the global landscape grows increasingly competitive, the demand for high-quality education has never been more pressing. Individuals are seeking advanced professional training from prestigious institutions to meet the challenges presented by today's dynamic job market. Furthermore, it is important to note that the expenses associated with child care, particularly educational costs, are escalating at a rate surpassing average inflation levels.

For parents, planning for the child’s education is one of the crucial financial goals. Mutual fund investments can cater to a diverse range of goals. 

Children's Mutual Funds represent a specialised category of mutual fund schemes tailored to accumulate savings for future necessities such as education, marriage, and general welfare of children.  Children's mutual funds in India are tailored for long-term financial planning for children. It is generally conceived that one should start planning for their child’s education at an early stage. 

Points to note

Lock-in Period: These funds have a mandatory lock-in period of 5 years, with some extending until the child reaches adulthood. Certain funds offer options between the 5-year lock-in and the child's adulthood.

Tax Benefits: Investing in children's mutual funds qualifies for income tax exemption under Section 80C, up to Rs. 1.5 Lakh deduction. Additionally, parents can claim an annual exemption of Rs. 1,500 per child if interest income exceeds Rs. 6,500.

Business Today spoke to Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited, who shared his views about investing in these focused funds.

His top recommendations for this category are:

Scheme Name	1 Year	3 Years	5 Years
Tata Young Citizen Fund	30.3	21.2	24.3
HDFC Children's Gift Fund	28.0	23.1	24.3
UTI Children's Equity Fund(G)	31.0	17.6	21.4
ICICI Pru Child Care Fund-Gift Plan	42.2	24.8	21.0
LIC MF Children's Gift Fund(G)	27.0	15.0	15.4

            
How to plan mutual fund portfolio for kids?

The decision of whether or not to invest is influenced by numerous factors, including period of investment, risk tolerance, and commitment to sticking with your investment choices.

Talking about investment in children-focussed finds, Azeez said: "We suggest parents create separate portfolios in pure pay equity and debt for their children instead of opting for this category of funds primarily because of the liquidity advantage and most of the funds in this category have not been able to deliver return better than Nifty."

Azeez said: "The first step of financial planning which parents will have to follow is determining their period of investment. For example, a nursery kid and a middle school kid’s parents will have more time to plan compared to someone whose kid is in high school."

•    There are several factors to be considered for investment while planning for higher education such as:
o    Seasonality inflation 
o    Liquidity risk
o    Tenure 

•    For parents who wish to send their children to foreign countries for their education, they need to consider few more factors such as :
o    Rupee Depreciation
o    Living Expense 
o    Additional Travel Expense 

"It is important to generate real returns after factoring in inflation. Currently, inflation is around 8%, you should at least set a return expectation of 12%," Azeez added.

How to go about it:

Azeez said one must look into a couple of points before investing. 

1. Set Clear Goals: Determine how much you'll need for your child's education and living expenses overseas. Consider factors like tuition, accommodation, travel expenses, and other associated costs.

2. Budgeting: Create a budget to manage your finances efficiently. Allocate a portion of your income specifically for your child's education fund.
Start small and start early 

3. Setting a return objective based on the tenure and help in building a strategy can help achieve these goals easily. Saving lumpsums or bigger SIP amount with a small tenure is always more difficult

Asset allocation Strategy

"There is no one-size-fits-all solution in investing however some standardization can be done through asset allocation," Azeez said. 

He added: "Debt and Equity have a low correlation and a combination of these two assets can help in targeting a return around 12%. Equity has delivered an average return of 14% over longer tenure and Debt have approximately delivered 6% return.

These portfolio mixes can help in targeting respective returns with calculated risk, he further said.

Long Term Goal 

If one is planning to invest for above 5 years, then there is enough time to plan your investments.

> Here the Return Objective – Around 12%

> Strategy: SIP or Lump-sum investment in the 80:20 ratio in Equity and Debt funds for the first 3-4 years and in the last 1 year towards nearing the tenure end start moving funds to liquid funds.

Azeez picked up the following funds for investment for long term with equal weightages in each category:

Categories	Fund from each Category
Large and MidCap Category	DSP Equity Opportunity Fund
Flexi Cap	HDFC Flexi Cap Fund
Mid-Cap Category	Kotak Emerging Equity Fund
Focused Category	ICICI Pru Focused Equity Fund
Contra fund	SBI Contra Fund

Azeez further recommends that in case parents are planning to send their child abroad, they can invest some portion of their corpus in funds that invests in overseas companies. This will help them build a portfolio that can counter rupee depreciation to certain extent.

Category	Fund Name
Global Fund	Mirae Asset NYSE FANG+ETF FoF-Reg(G)
Global Fund	Franklin Ind Feeder-Frank US Opp Gr

 A look at the historical performance of the above mentioned funds:

Scheme Name	1 Year Return (Annualized) %	3 Year Return (Annualized) %
DSP Equity Opportunities Fund-Reg(G)	45.25	23.96
HDFC Flexi Cap Fund(G)	44.20	33.38
ICICI Pru Focused Equity Fund(G)	47.70	29.06
Kotak Emerging Equity Fund(G)	42.40	27.57
SBI Contra Fund-Reg(G)	50.77	40.29
Mirae Asset NYSE FANG+ETF FoF-Reg(G)	76.6	-
Franklin India Feeder - Franklin U.S. Opportunities Fund(G)	40.4	9.2

*Return till Mar’24
 

Disclaimer: The views and investment tips by investment experts are their own and not that of Business Today. Readers are encouraged to consult a qualified financial advisor or a SEBI-registered investment advisor before making any investment decisions.