- 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.
