Despite volatility, don't stop SIPs in MF child plans

Returns from these are superior to those offered by insurance firms

Inflows in child-care schemes of mutual funds this year have ground to a halt after seeing sizeable inflows in calendar year 2014. Experts believe some investors may have stopped their monthly investments as the market has been considerably volatile.

There are nine child plans in the market. Five are debt-oriented. These funds are generally conservative and have a low churn ratio, say experts. “Investors should not exit these funds just because of temporary blips in performance but keep their overall goal in mind. Also, since these are hybrid funds, one should not make the mistake of comparing returns with other diversified equity funds,” said Suresh Sadagopan, a certified financial planner. He added these funds are suitable for conservative investors and investors should stay put as long as these funds give two or three per cent higher returns than pre-tax fixed deposit returns.

Investors switching between child plans should remember they will have to pay higher taxes if their fund is debt-oriented. The gains will be added to income and taxed in line with individual slab rates if the exit is before three years. Also, these funds charge an exit load of one-three per cent for exits ranging from zero to seven years. “Switch funds only if a particular fund has consistently underperformed its peers for four-eight quarters,” said Sadagopan.

For instance, UTI CCP Balanced Fund charge an exit load of three per cent for exit before two years, two per cent for exits before four years, and one per cent for exit before five years. “Higher exit loads serve as an inbuilt deterrent, which is good for investors since the investments are meant for a longer duration,” said Sadagopan.

“Investing for children requires a systematic approach of high exposure to equity in the formative years of the child and increasing exposure to debt in the later part of the investment horizon. It is important to look at suitability in terms of investment horizon and goal,” said Nimesh Shah, managing director and CEO, ICICI Prudential MF.

However, don’t rely on only child plans to meet all your children's goals. “If the child is less than five years, you can invest 60 per cent in equity and the rest in debt-based products such as PPF (public provident fund),” said Sadagopan. If the child is 10 years and above, Sadagopan says, one can look at a 50-50 ratio or 50-60 ratio in favour of debt. Besides mutual funds, investors can also look at child plans from insurance firms, which combine a component of savings with insurance. These plans waive off all future premia and give a fixed sum assured to the beneficiary in case of the demise of the parent.

The flip side is that annual returns are usually six to eight per cent. “Broadly speaking, MF child plans are better than those from insurers. Those buying these plans can take care of the insurance component by buying an appropriate term plan,” said Sadagopan. MF child plans have given average category returns of 15. 6 per cent, 17.7 per cent and 11.7 per cent for one-year, three-year and five-year periods, respectively. MF child plans are inferior to those offered by insurers in some respects. “These plans do not offer a nominee or second-holder facility. If the parent dies, the money may get locked in till the time the new guardian is appointed, which could take 3-6 months. This is not the case with insurance plans,” said Nagpal. MF child plans also offer guaranteed returns such as those offered by insurance firms.