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Child Education Planning

With cost of higher education shooting up, fixed income return options are unlikely to help you save for your child's future. You need to aim for equity returns.

People usually save either for retirement or with a specific goal in mind. One of the goals is children's future like education , car amongst others. Here we focuses on the children's future as a goal.

There are 3 key variables that you broadly need to keep in mind when planning for children:

  • The amount you may need for the child's education (and marriage)
  • Years left to the event
  • Return expectation to build in

    This will determine the monthly or annual figure you need to set aside to meet the goal.

    We illustrate the interplay of the above 3 variables with the following table, where we are planning to save Rs 75 lakh by the time the child turns 18:

    If you are a parent, you unarguably aspire to offer the best to your children - a sound education, a decent lifestyle and a grand wedding. Some of us also dream of buying a house for our children when they grow up and not to mention help them to establish their own businesses. But in order to fulfil these desires it is imperative that you follow the right approach towards planning for your financial goals. And for those of you who think that it is too early to plan for your child's future, let us apprise you that it is never too early to work towards achieving these goals as it will not be too long before your little bundle of joy grows up.

     You might be in awe when the kid who played with toy planes in his childhood came to you one day sharing his ambitions of becoming a pilot or when your little girl who dressed up dolls as a child decided to become a top fashion designer. Every parent wants to see his child do well in his chosen career option. But this sheer happiness of hearing your child's dreams could become sour in case you never planned or saved for his future.

    Today, people have started realising the fact that the high cost of education and sky rocketing marriage expenses can put you knee deep in debt if you don't save regularly. But the question we want to ask you is - can saving alone be enough? Unless you don't invest your hard earned money in the appropriate investment avenues, the inflation bug will eat the value of your savings every single day.


     Recognising this concern, many companies have launched a number of financial products which claim to take care of most of the expenses associated with your child's future. However many of these "childcare" investment plans turn out to be nothing but costly Unit Linked Insurance Plans (ULIPs). You see, more often than not ULIPs and endowment plans don't offer adequate insurance and nor do they generate adequate returns which can counter inflation. Some Mutual Fund houses too have launched products which are said to have designed especially to take care of childcare expenses.

    Now, you might be wondering what exactly these "child care" mutual fund schemes are. It is noteworthy that most of the schemes function like normal mutual fund schemes but with a different asset allocation pattern. While some might have a higher exposure to debt to provide stability to the portfolio especially for investors whose financial goals are near to realisation, others might focus more on equity investments to provide growth for their investors whose goals are far from maturity. However another key difference between diversified equity oriented mutual fund schemes and speciality child care schemes is their "exit load". Since investing for your child's future is considered a long term investment, most of these schemes come with a high exit load to discourage parents from early redemption. Let's have a look at how some of these schemes have fared-

    Report card

    Scheme Name 6 Mths 1-Yr 3-Yrs 5-Yrs Risk* Risk-Adjusted Return** Equity exposure Debt exposure Exit Load
    Speciality - Children Benefit Plans
    ICICI Pru Child Care Plan-Study Plan 5.7 10.7 8.8 13.1 1.39 0.05 24.58 75.42 1.00
    HDFC Children's Gift Fund-Investment 8.2 11.4 8.5 24.9 3.63 0.02 69.39 27.35 3.00
    HDFC Children's Gift Fund-Savings 1.2 4.5 7.2 12.1 1.20 -0.04 17.90 80.92 3.00
    UTI CC Balanced Plan 1.8 5.5 6.2 8.4 2.09 -0.07 39.49 60.29 3.00
    SBI Magnum Children Benefit Plan -1.9 -1.2 5.3 8.5 2.36 -0.08 24.73 75.27 3.00
    Tata Young Citizens Fund 0.4 3.0 5.2 14.4 3.11 -0.08 48.90 51.03 3.00
    Templeton India Children's Asset-Educ (G) -4.1 1.7 4.2 7.0 1.39 -0.18 17.58 82.15 0.00
    Templeton India Children's Asset Plan-Gift Plan (G) 1.1 4.1 4.0 16.2 3.33 -0.09 66.05 33.05 0.00
    ICICI Pru Child Care Plan-Gift Plan 7.6 1.7 1.4 20.9 5.68 -0.09 73.23 26.77 1.00
    UTI CCP Advantage Fund (G) 2.7 1.2 0.6 12.9 5.02 -0.10 92.37 6.64 4.00
    LIC Nomura MF Children (G) 2.5 6.1 -0.2 11.8 3.79 -0.16 100.00 0.00 1.00
    Peerless MF Child Plan (G) 3.0 4.0     1.02 0.07 23.85 76.15 1.00
    S&P BSE SENSEX 5.2 7.5 1.6 18.7 5.11 -0.08 - - -
    Balanced Funds
    ICICI Pru Balanced Fund (G) 6.1 9.3 8.2 20.0 3.57 0.01 68.04 31.96 1.00
    HDFC Balanced Fund (G) 6.8 6.6 5.6 22.7 3.79 -0.05 67.70 30.09 1.00
    Canara Rob Balance Scheme (G) 3.2 1.6 4.9 19.4 3.26 -0.07 72.62 26.20 1.00
    FT India Balanced Fund (G) 2.3 6.1 4.6 16.3 3.56 -0.07 71.17 27.86 1.00
    Crisil Balanced Fund Index 1.1 5.1 3.4 14.8 3.57 -0.09 - - -
    Data as on December 01, 2013.
    Equity and Debt Exposure to respective funds is as per portfolio as on October 30, 2013
    *Risk is measured by Standard Deviation; **Risk-Adjusted Return is measured by Sharpe Ratio. They are calculated over 3-Yr period assuming a risk-free rate of 7.38% p.a.
    (Source: ACE MF, PersonalFN Research)

    In the above table, we have compared almost all the existing children benefit plans offered by mutual funds with four balanced funds (viz. ICICI Pru Balanced Fund, HDFC Balanced Fund, Canara Rob. Balanced Fund and FT India Balanced Fund). 

    We have also taken into consideration some broadly followed benchmark indices (S&P BSE Sensex and Crisil Balanced Fund Index) for comparison purposes. While comparing these funds, it will be prudent to compare those funds with a similar asset allocation. Although HDFC Children's Gift Fund-Investment features among the top performing funds in the category across the last 1 and 3 year time frames, it carries a high exit load of 3% and is one of the most volatile funds in the category (with a standard deviation of 3.63%, calculated over the last 3 years). 

    However when compared to S&P BSE Sensex, the fund has performed well across most time frames and also been less volatile than the index. It is noteworthy that the same cannot be said for all the funds in the child plans category since many funds in the category have generated poor returns vis-a-vis the S&P BSE Sensex Index across the last 1 and 5 year time frames.

    In the balanced funds category, ICICI Pru Balanced Fund (an equity oriented balanced fund with a similar asset allocation pattern as HDFC Children's Gift Fund-Investment) has been giving tough competition to HDFC Children's Gift Fund-Investment with lower exit load and standard deviation. It has also managed to outperform most other funds in the category of balanced funds over 1 and 3 year time frames.

     When compared against the Crisil Balanced Fund Index, ICICI Pru Balanced Fund has managed to beat this index across almost all time frames. It is noteworthy that all the 4 funds in the balanced funds category have managed to outperform the Crisil Balanced Funds Index across the last 1, 3, and 5 year time frames.

    You see, investing merely in specialty funds may not help fulfil all your objectives. Let us explain you this with a very simple example- when wanting to buy any consumer durables (such as television, refrigerator or even mobile phones) most of you will compare the features of competitor products and brands (such as price, warranty, quality, longevity, reviews etc.) irrespective of their attractive packaging or advertisements. We have been taught since our childhoods that what we see may not always be true in reality. It pays to thoroughly analyse everything that you are putting your hard earned money into. The same is true in case of speciality funds as well.

    Understanding this example

    As you can see, there is a vast difference in the monthly amount you need to save, with difference combination of years left, and returns you will earn.

    So our first advice to you is to start early. If you start investing for a child when you marry, you may have as many as 20 years ahead of you. But if you start when the child is say 5 or 8 years old, then you could be left with barely 10-12 years. The more the years you have, the less you need to set aside on a monthly basis.

    The other critical part is the return your savings are generating. It is common to find parents investing in fixed deposits or Public Provident fund(PPF) to sponsor their children's education or marriage. While as an investment option it is safer, it also generates paltry returns of 8-9% per annum. While interest on PPF is tax-free, that on fixed deposit is taxable, which pulls down the post-tax returns even further. Given the rate at which cost of higher education is shooting up in the country, debt definitely seems an investment option not worth considering.

    As against this, if you try to aim for equity investments, your returns could be between 12-14% per annum, which is the bare minimum returns equity markets show over long periods. Given the long term horizon, short term market swings are unlikely to affect your final return, and chances of making true equity returns are higher. As your approach the last 2-3 years of the child's educational needs, you can choose to shift the portfolio towards debt, to eliminate any volatility risk - though this would not be a major consideration as the requirement for funds would be spread over a 3-4 year period.

    Why Rs 75 Lakhs?

    Rs 75 lakhs may sound like a large number, but remember that with normal inflation, costs double every decade. In addition, inflation in education related expense is expected to be higher than average inflation and therefore even the Rs 75 lakhs, in about 20 year time, is not a large number.

    How can you go about your investing in Equity for this purpose?

    Many parents prefer to open an investing account in the name of the child, in order to isolate the account, accommodate for gifts in the name of the child, and for tax reasons. If you plan to save in the name of the child, note that you cannot open a demat account in the name of a minor, and therefore the route to equities will have to be through a Mutual Fund.

    Investing independently into equity funds over such long horizon requires keeping track of performance and weeding out of underperforming schemes. If you are not up to regular monitoring of funds, then you need to seek help of financial advisors, who will do it for you, but you need to trust their subjective judgment.

    We wish you and your child the best in this journey, as Benjamin Franklin once said, "The best investment is in an investment in education".

    You must have heard this at least a hundred times: equity mutual funds are the best way to create wealth over the long term. Are small investors listening? It doesn't seem so. According to the Association of Mutual Funds in India (Amfi), retail investors do not stay invested long enough in equity funds to realise the potential of this asset class. The average equity fund investor stays with it for only 18 months. Nearly 38% of retail investors exit equity funds before they complete two years.

    Child Education is probably the first major financial goal for which every parent wants to plan. The costs of professional courses are already high and shall get costlier due to inflation as the time passes.

    Thus, it is important for parents to start investing early and in low cost, transparent investment options to create a large fund to meet the future education needs of the child.

    Listed here are best mutual funds for Child Education Planning. The Funds have been selected on the basis of the nature of their investments. An investor should invest in the funds that are suitable for his child's age.

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