Do Children Plans from Mutual Funds Makes Sense

I have been following Mutual Industry for past 15 years and I have always found that whatever the market/sentiments/economic condition, they find ways to make investor invest. Sometimes they are original ideas but mainly, they copy. A Recent one is – CHILDREN PLANS. These are also called Children Targeted Funds or Child Growth Funds. The concept of Children Funds has come from insurance industry but they don’t realize that over time, in insurance also the concept has fewer takers as people have become aware that policies in name of children are just marketing gimmicks.

What are Children Plans? Or Child Care Plans? Or Children Growth Fund?

These are mutual funds scheme, where the investments are done in name of child as beneficiary. Since a minor alone cannot hold an investment in his single name, the guardian or parent are attached as a donor in the folio/account.

The fund composition is same as any other MF scheme. Generally, they are hybrid versions- meaning equity 50-75% and Debt 50-25% as per fund manager discretion and objective of the plan. Hence they are similar to a balance fund or a large-cap equity fund.

Since, they are tied to child growth stages (education or marriage), the fund has a certain restriction in withdrawal. There can be a lock in period for certain years or only partial withdrawal is allowed till the age criteria are met.

Why the hype now?

My concern is that 4 MF companies have filed for schemes based on this theme. These are:

Reliance Children Fund, SBI Children Benefit Fund, DSP Black Rock Children Gift Fund, and Mahindra Bal Vikas Yojana. The SEBI has received their draft offer letters.

So why the push?

• The NFO new fund offers have lost its charm. Investor understands that Rs 10 is not cheap than Rs 90 when it comes to NAVs. The return is on your purchased NAV and not the face value.
• Child related plans have emotional appeal and hence can be marketed easily.
• Since the scheme is planned for kids, the money lies with MF companies for a long time and they earn over it in form of fees and management charges.
• They have planned to launch specialty funds—as these aim to help you in fulfilling specific goals. So no market/return storytelling is required.
• Have lock-ins so better payout to middlemen. He is happy so the company is happy too.
• Snatch the market share from insurance companies. Instead of making an own pie, or enlarging it they are trying to eat the existing pie.

Should you invest in these Child Benefit Plans? (or should I say MF company’s benefit Plan or Agent Benefit Plan)

Well my answer is strictly NO for following reasons:

• You should invest in a scheme with no track record only when it has something new for your portfolio. In simple English, it means if the scheme diversifies risk or generate more returns to the portfolio it makes sense to switch. Otherwise, time tested and old funds are better than funds with no track record.
• Without them also, your goals related to the child are taken care of. Simply what do you want for a child? His education requirement is taken care by investing a certain amount in form of SIP or lump sum in any fund with no lock-ins or conditions. So you do not require any specific fund to do that. Also, you require income replacement in case you are no more due to death/disability. This can be done by investing in a term plan and there is no substitute for that.

Will you miss investing in a Child Related Fund?

Have a look at the top performing Child Care/Benefit Plans:

Now have a look at returns from top 10 Large-cap Funds and Balanced Funds:

Do you see any substantial difference? In fact, Large caps and balanced have performed better than these Children Benefit Plans in longer horizons. The expense ratio is similar for all these three categories of funds.

Share your experience if you have invested in any of these plans or insurance policies for benefit of your child. Awaiting your comments.