HOW TO SELECT THE BEST MUTUAL FUNDS FOR KIDS

It is said that mutual funds are a solution to a lot of problems and challenges. Planning for your child’s education and secure future is one such challenge and here again it is mutual funds that come in very handy.

HOW AND WHY TO GET STARTED WITH MUTUAL FUNDS FOR CHILD’S FUTURE

One of the key life goals, other than retirement planning and buying a house, is to help secure your children’s future. The priority is to make sure you have enough funds to fulfil your child’s educational needs at a high quality institution. There are other expenses like child’s wedding, jumpstarting their careers etc. However, education holds the key to most of the dreams that your child may have in life.

There are two ways to go about planning your child’s future. One way is to focus on children dedicated plans. Most of them have in-built insurance. The second approach is to separate the investment part and the insurance part. That means you grow your child’s corpus through equity mutual funds that compound wealth and buy term insurance separately to take care of contingencies. The latter is a more scientific approach as you separate savings, investments and insurance in this case.

SOME HIGH QUALITY CHLIDREN’S PLANS FOR YOUR CHILD

As we said earlier, you can opt for both approaches. That means; You can treat mutual funds and insurance separately. Alternately, you can opt for a child plan which comes with a lock-in period and also a saving for your child with insurance built-in. To be fair, the children’s plans have done fairly well over a period of 5 years. Short term returns do not make too much sense, but median returns of 11-12% over 5 years on CAGR basis is extremely impressive and since it comes with insurance in most cases, this is a good option to look at. Here are the top performing children’s plans in India and many of them have given returns in excess of 13% CAGR over 5 years.

Children’s Fund (Direct/Regular)	1 Yr Returns (%)	3 Yr Returns (%)	5 Yr Returns (%)
Axis Children’s Gift Direct No Lock in Growth	20.2728	17.7027	14.5353
Axis Children’s Gift Direct Lock in Growth	20.0350	17.5380	14.3677
UTI CCF- Investment Plan – Direct – Scholarship Plan	20.5324	17.0561	14.1778
UTI CCF- Investment Plan – Growth- Direct	20.5324	17.0561	14.1778
HDFC Children’s Gift Fund Direct Plan	19.9512	15.7078	14.1322
HDFC Children’s Gift Fund Direct Plan(Lock-in)	19.9512	15.7078	14.1322
UTI CCF- Investment Plan – Scholarship Plan	19.2824	15.9562	13.1270
UTI CCF- Investment Plan Regular Plan Growth	19.2824	15.9562	13.1270
HDFC Children’s Gift Fund	18.9585	14.7395	13.1096
HDFC Children’s Gift Fund(Lock-in)	18.9585	14.7395	13.1096
Axis Children’s Gift Regular Lock in Growth	18.7340	16.1163	12.8031
Axis Children’s Gift Regular No Lock in Growth	18.7340	16.1163	12.8030
Tata Young Citizens’ Fund (After 7 years) Direct Plan Growth	21.5499	17.8371	12.3469
Tata Young Citizen [After 7 years]	20.8337	17.0394	11.3773
SBI Magnum Children’s Benefit Fund Direct Growth	16.5447	11.1543	11.177
SBI Magnum Children’s Benefit Fund Regular Growth	15.9791	10.4075	10.2900
ICICI Prudential Child Care Fund (Gift Plan) Direct Plan	18.2483	11.8293	10.1395
ICICI Prudential Child Care Fund (Gift Plan)	17.3648	11.0248	9.2913
UTI CCF- Savings Plan – Direct	13.2477	9.7390	7.8773
UTI CCF- Savings Plan – Direct – Scholarship Plan	13.2477	9.7390	7.8773
LIC MF Children’s Gift Fund Direct Plan	12.2984	12.1977	7.8289
UTI CCF- Savings Plan – Regular Plan	12.9971	9.5006	7.6577
UTI CCF- Savings Plan – Scholarship Plan	12.9971	9.5006	7.6577
LIC MF Children’s Gift Fund	11.1928	11.2091	6.8336

Of course, most financial advisors will suggest you to separate insurance and mutual funds, but then you do have the option of buying consolidated children plans that come inbuilt with an insurance cover for the parent. Th choice is yours.

WHAT IDEAS WE CAN TAKE AWAY ON CHILD PLANNING

Mutual funds can be an excellent option of investment and in fact, these must be your first port of call. There are two ways. If you are comfortable managing your mutual fund investments and your insurance separately, then you can opt for the option wherein you buy mutual funds separately and buy insurance policies separately. If your goal is to save up for your child’s education, it is wise and advisable to separate SIPs for different goals. This will ensure that you do not touch your child’s mutual fund for other uses.

However, there is the option of opting for a readymade child plan that comes in-built with insurance. That is a lot simpler and easier to implement and you can always opt for that if you don’t want to go through hassles. But here are some basic rules for you to remember.

GROUND RULES FOR PLANNING YOUR CHILD’S FUTURE

The biggest investment you make is in the future of your children. Remember that your child’s college and post-graduate education is a very major investment that you need to make during your life time. The cost of higher education has surged substantially and is now an amount that needs to be meticulously planned for.

However, planning for the future of your child is not just about growing your investments or making the corpus ready. It is also about planning associated risks and making provisions for the same. Here are 6 ground rules you must follow while planning for your child’s secure and rosy future.

RULE 1: BE PRAGMATIC ABOUT COSTS, NOT OPTIMISTIC

The amount of money you spent on your entire education 30 years back is what you have to spend for your child in 3 years of primary schooling. Today an Engineering or MBA degree from a quality institution can set you back by Rs.40-50 lakhs. If you are planning to educate your child abroad then multiply the amount by 4 or 5. Plain inflation indexing does not work. Assume that costs will go further up in the next 20 years.

RULE 2: THE EARLIER YOU START, THE BETTER IT IS

If you daughter is just 2 years of age, don’t believe it is too early to start planning for her college education. In fact, that is the right time. The earlier you start, the longer you are able to save and the longer your investment multiplies. The longer you invest, the longer your money earns returns and therefore the longer your returns earn further returns. This process of reinvestment is called the power of compounding and you must make the best use of it to create a fantastic plan for your child’s future.

RULE 3: ONLY EQUITIES / EQUITY FUNDS CAN GET YOUR TO YOUR GOAL

The beauty of equities is that they may be risky in the short run but are great wealth creators in the long run. If you start planning early, you have more time on hand. As a result, you can leverage on the power of equities adequately. Debt funds are OK for a 3-4 year goal, but if you have a 10-15 year goal then equities are the best answer. Remember that the BSE Sensex has itself given annualized compounded returns of over 16.3% over the last 42 years since inception. You really cannot get better than that.

RULE 4: SIP APPROACH BEST SYNCS INFLOWS AND OUTFLOWS

Why to opt for a SIP approach? Apart from Rupee Cost Averaging (RCA), SIP approach also synchronizes your investment outflows with your inflows. That reduces pressure on finances. Check the table below.

Planning for your child’s education corpus of Rs.1 crore in 2033

Planning for your child’s education corpus of Rs.1 crore in 2033
SIP Starts in	2018	2020	2022	2024	2026
SIP on	Equity Funds	Equity Funds	Equity Funds	Equity Funds	Equity Funds
Target in 2033	Rs.1 crore	Rs.1 crore	Rs.1 crore	Rs.1 crore	Rs.1 crore
Tenure	15 years	13 years	11 years	9 years	7 years
Annual Yield	15%	15%	15%	15%	15%
Monthly SIP	Rs.16,224/-	Rs.22,472/-	Rs.31,703/-	Rs.45,988/-	Rs.69,754/-

For a 2033 goal, just look at how much you would have saved had you started early

RULE 5: CREATE TIME BOUND MILESTONES FOR YOUR GOALS

When your child gets admission into a reputed college then the money will have to be paid at regular intervals, including a large amount upfront. At least 1 year before the milestone, the equity funds should be converted into liquid funds or Short Term debt funds. You cannot afford to take price risk around the time of the milestone. This will ensure that liquidity is available when required without any price risk. There are no last minute surprises.

RULE 6: INSURE YOUR CHILD PLAN AND MONITOR REGULARLY

How to insure a child plan? You can opt for a specialized child education plan offered by mutual funds which combines an insurance component also. If something happens to the parent then the child plan continues without further contribution. The other option is to take a term plan. Either ways, insurance is a must.

What do we mean by monitor? Is the plan on track to meet goals or have the costs gone up more than anticipated? Are investments delivering the goods as you anticipated? Based on monitoring, take a call on rebalancing the child’s education plan if necessary.