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
|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|
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.