Child MF plans better than insurance products

Add a term plan with a child mutual fund for best results, say financial planners

Saving for children’s future is one of the main worries for any parent. With the cost of education rising exponentially, most are worried if they would be able to save enough. According to an Assocham survey conducted in May, the cost of education has increased by 150 per cent in the past decade. According to the survey, 70 per cent of parents spend as much as 30 to 40 per cent of their salary on their children’s education.

Hence, there are many parents who are seeking products that will help them save enough to fund their children’s future needs. While mutual funds are recommended as ideal long-term instruments for these needs, there haven’t been many schemes targeting this segment. HDFC Children Gift Fund and ICICI Prudential Child Care Plan are two  that have been there for over a decade. And, have given reasonable returns at 11.13 per cent and 12.83 per cent annually since their launch in 2001. Unfortunately, both these schemes have collected a total corpus of only Rs 160 crore. In comparison, insurance companies have a large number of products in this category, generally unit-linked insurance plans, that are being pushed aggressively – “At 18, your angry child won’t look so cute” is one such advertisement.

MFs seem to be getting more aggressive with child’s plans now. Axis MF has recently launched a product Axis Children’s Gift Fund. Reports suggest L&T MF is also planning to launch a fund in this category. Says Ashwin Patni, fund manager and head, products, Axis MF: “This is a balanced fund, which will invest 50 to 55 per cent in directional equity, 10 per cent in mix arbitrage and the rest in debt.”

According to him, the stock focus will not be large, mid or small cap. But, they are looking at a long- term orientation in their portfolio. Patni recommends investment for at least 10 to 15 years in the scheme. The scheme, therefore, is debt-oriented much like HDFC and ICICI’s existing schemes. Taxation will also be like debt funds in which returns will be added to your income if you exit before three years and taxed as per the income-tax bracket. After three years, taxation will be 20 per cent with inflation indexation benefits.

On the other hand, if you buy a child insurance plan, the product will be an insurance-cum-investment plan, better known as, unit-linked insurance plans. So, there is an inbuilt insurance component because it assumes that if the parent dies, the child should have enough to complete the education. So part of the premium goes towards paying for life cover. The remaining part is invested in debt and equities. Also, the costs are higher because there is premium allocation and other charges. These plans get benefits under Section 80C while an investment – a major draw in the tax season. On withdrawal, the tax benefit will depend on the premium-to-sum assured ratio.

Given the costs, financial planner Suresh Sadagopan, says that ideally, one should prepare a portfolio with a proper mix of debt and equity for children’s education. However, if one is unable to do so, a child MF coupled with a high-term plan insurance should be best for the child’s future.