For Children - With love from MFs

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For Children - With love from MFs

June, 2001

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Mutual Fund schemes focusing upon the clientele in select age group are not common as of now. However in recent times various mutual funds have lined up schemes targeting children. Presently we have Children’s schemes from UTI, Kothari Pioneer, HDFC, IDBI and Tata Mutual Funds. SBI Mutual Fund, LIC and Prudential ICICI are in the process of launching their own schemes targeted at this segment. The main attraction of these schemes for mutual funds is that the amount mobilized stays with the fund usually till the child reaches maturity, earning the AMC a neat management fee. Agents too are interested in marketing these schemes as agents earn a trail commission based on the amount of time the investor stays with the scheme. Thus agents usually end up earning this commission for anywhere between three to ten years on an average for mobilizations under such schemes.

Let us take a look at the important features of the scheme and what they have to offer for the investors.

Type and Nature of schemes: All these schemes are open-ended but since they are for a specific purpose, they are slightly different from regular open ended funds. These funds are open-ended only in terms of investments but have a minimum lock-in period for redemption.

Lock-in period: A typical children fund will have a lock-in period till the beneficiary child turns 18 years of age and will attract investments from people when the child is still a minor. Though the investment is locked and thus reduces liquidity, the investor will also be benefited, as he cannot withdraw the funds in a child plan while he may be tempted to do so in case of investment in any other fund. This also makes business sense as it gives the fund manager adequate time to show good performance.

Portfolio Composition: The portfolios of these schemes are generally debt oriented though some of them also invest in equity as well. Capital preservation and then capital appreciation over a period of time is the target of these schemes. The asset allocation of some of the schemes is as follows:

Name of the Scheme	Asset allocation
Name of the Scheme	Equity	Debt	Money Market
IDBI-Principal Child I Nit 97 - One Time	0%	75.36%	24.64%
IDBI-Principal Child I Nit 97 – Recurring	0%	62.98%	37.02%
Kothari Pioneer Children Asset Education Plan	0%	61.94%	38.06%
Tata Young Citizen’s Fund	45%	43%	12%

Performance: The performance of most of the existing funds has been quite decent as can be seen from the returns from some of the schemes.

Name of the scheme	Return since inception
IDBI-Principal Child I Nit 97 - One Time	10.46%
IDBI-Principal Child I Nit 97 – Recurring	9.74%
Kothari Pioneer Children Asset Education Plan	12.51%
Kothari Pioneer Children Asset Gift Plan - Dividend	12.87%
Kothari Pioneer Children Asset Gift Plan - Growth	12.87%
Tata Young Citizen’s Fund	12.95%

In general the performance of these schemes is expected to be good irrespective of their structure. Equity investments tend to perform better and with some consistency in the longer run, as fund managers will be able to take better calls on the stocks. This is possible because there is a lock-in period in all these schemes as they allow redemptions only after the beneficiary turns major. The debt holdings will fetch better returns as long dated papers bear higher coupons.

Some of the schemes also offer additional features. HDFC provides a personal accident cover to the beneficiary (child), the premium for which would be borne by the AMC. There is no TDS and also no wealth tax liability for units held under the scheme. Like HDFC, Tata Young Citizen’s Fund also offers Personal Accident Insurance for resident unit holders. In UTI’s Children College and Career Fund, The amount is not clubbed with the parents’ or guardian's income, making it totally tax-free. The scheme is also exempt from Wealth Tax.

While the lock-in period of these schemes seems like a deterrent, considering the other features and benefits offered, these schemes make an attractive investment option for parents who want to invest for their children’s future.

A Srilakshmi

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