Want your little one to own Rs 1 crore (Rs 10 million) on the 12th birthday? No need to scout far. There are as many as 16 children mutual funds (MFs), offering returns sans risks. The most profitable one clocked 65.48 per cent annual returns, while the second and third came up with 56.82 and 52.59 per cent.
Educate your kid and at the same time and enrich him. Professional courses costing Rs 4 lakh can skyrocket up to Rs 18,64,382 in 20 years. So, tap MFs for kids, as these can invest in equities, offering dream returns.
How much should you invest in a children MF? Just put Rs 3,000 a month to gain handsome returns. What about risk? If money is needed for a child after a long tenure, say seven years, one can invest in a child MF plan, which has higher equity allocation.
In fact, when the child is very young, say a new born or below five years, you can take maximum risks. Opt for plans which invest more in equities. When the kid is 6-11 years, reduce the equity component to 60 per cent and for children between 12-18 years, bring down equity allocation to 30 per cent.
Going by the name of child care plan, gift savings, study plan, career builder and a host of other titles, children MFs are like balanced plans, which offer both debt and equity options. The whole amount is never invested in equity. The debt portfolio also includes quality instruments, with AAA and AA ratings.
How to choose the correct children MF? Pick one scheme, which has been around for five years and check the long-term performance of the fund, say three to five years, not six months or one year.
The place to look for such schemes is the prospectus, which enumerates average annual returns of the past one to five years. It would also be advisable to know how regular equity schemes are doing. Study NAV figures, of children MFs, stretching up to three years. An NAV which shows steady rise is preferable.
Select a children MF which has many options for asset allocation. For example, where a fund states it would put 60 per cent in debt and 40 per cent towards equity, the investor has no choice but to accept this asset allocation. Instead, it would be better to look at schemes, which announces options, like, a children MF may ask if you want to go for (1) regular or income plan (2) debt-oriented plan or (3) balanced plan, which allots 60 per cent to debt and 40 per cent to equity. As there are choices, there is flexibility, opportunity to be aggressive with equity and also a chance to take moderate risks. Don't go for a children MF which, has one investment option. Look for one which incorporates two choices, namely (a) units can be redeemed after the child turns 18 and (b) the units can be redeemed any time after three years.
There are two tools that track and measure children MF performance and are useful for both the beginners and a veteran investor:
Standard Deviation (SD): How far the MF has strayed from average returns is known by looking at the SD rate. It tells the parent whether the fund is on the correct path. A high SD rate means the fund is off the course. For example, if one children MF shows a SD of 6.48 while another exhibits 4.22, the former should not be chosen. Opt for funds with a low SD, as they are not showing truancy.
Sharpe Ratio (SR): The tool quantifies how the children MF performs, relative to risks. Can the fund clock growth, despite volatility? In sum, how far can the returns outperform the benchmark index? The higher the SR, the better for the scheme. Example: If one children MF's SR is 0.31, while another scheme's is 0.33, don't choose the former. Go for funds which have high SR, as they are performing well, despite risks.
Be careful, about exit loads. Most children MFs charge money if the investor quits within three years. Afterwards, no exit load is imposed. But, some children MFs levy a two per cent exit load if you quit after three years. Expenses of a children MF must be scrutinised. There should be just two expenses, namely, investment management, which should not exceed 1.25 per cent and recurring expenditure, which must not go beyond 1.85 per cent, in any case.
Don't be misled by frills, like scholarship. If a fund is badly managed but talks of scholarships, the investor stands to lose because his main aim is capital expansion and risk-free investment. Search for a fund that does not club income of the child with parents, as it would deduct tax. Some such schemes still have a lock-in provision, the money cannot be withdrawn till the offspring turns 18. A parent who is apprehensive of dipping into funds can choose such plans.
Select children MFs which allow investment from the time the baby is born. And remember, they must continue for long-term. A fund which permits only three-month old children to enter or terminates investment at 15 years may not fit with a child's education plans. Make sure there's a monthly systematic investment plan (SIP) arrangement, not an annual one, as the latter may be expensive.
Find out if the fund allows switching. One must be able to switch after three years without restriction. It doesn't matter whether you do or don't. It's convenient to go for children MFs where one can sell units back to the fund in case of an emergency. This avoids a lot of running around and the process of getting money is expedited.
The aims of a children MF are capital appreciation and lumpsum capital growth, which can meet the cost of higher education for children and also enable the setting up of a profession, practice, business or setting up a home or fulfiling a social obligation. Do check if these are being achieved?
A parent, as a general rule, should allot 10 per cent of earnings per annum towards children's future. Such a small investment in an MF for kids can yield big returns. Another money-getting tip is to invest in five children MFs, instead of just one. Your child would get not just Rs 1 crore, but Rs 5 crore (Rs 50 million).