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Children benefit funds to hit market

Aabhas Pandya

Grappling with falling inflows, asset management companies (AMC) are now striking an emotional chord with investors. After bombarding the market with technology funds, monthly income plans and fixed maturity plans, mutual funds are now gearing up to offer investors a slew of children benefit funds.

As many as four fund houses- Prudential ICICI, LIC Mutual, SBI Mutual and IDBI Principal have filed offer documents with the same theme with the Securities and Exchange Board of India. IDBI Principal already manages a closed-end children fund, launched in 1997. The AMC now proposes to make it open-end with a larger allocation to equity.

The proposed funds come close on the heels of HDFC AMC's Children Gift Fund, launched in January this year. Apart from the planned launches, AMCs like Tata, Kothari and UTI already offer funds, targeted at generating adequate finances at critical time periods of the child's future.

Children benefit funds are essentially long-term in nature with the aim of providing a lumpsum capital at the end of the maturity period so as to meet expenses on higher education, marriage etc. Thus, most funds have a lock-in till the child attains the age of 18 years. However, investments can be withdrawn in the event of exceptional circumstances.

On the other hand, AMCs like IDBI Principal plan to offer target period plans ranging from 7 years to 15 years. This means investors will have to stay put till the expiry of the relevant target period, independent of the child's age.

Since investments in India are for the long haul, children funds have a balanced character with options that provide investors with a varying allocation to debt and equity. Normally, such funds carry a 20-40 per cent investment in equity markets with the rest in debt for stable returns.

On the other hand, some schemes now offer more aggressive options, where the equity component could be as high as 60 per cent. For instance, the HDFC Children Gift Fund's Savings Plan has a predominant exposure to debt at 80 per cent, with the rest in equities. The Investment Plan, however, carries the flexibility to invest in both debt and equity markets in the 40-60 per cent range. While this option is likely to be more volatile, it is suited for long-term investments.

Minimum investment in these funds ranges from Rs 2,000 to Rs 5,000 with a facility for systematic investment plan. Further, asset management companies offer insurance cover to investors to enhance the attractiveness of the fund. For instance, HDFC Children Gift Fund offers personal accidental insurance to resident unit holders. The insurance cover available is about 10 times the face value of units held subject to a maximum of Rs 3 lakh. On the other hand, once launched, IDBI Principal Child Benefit Fund plans to provide insurance cover for life to the first applicant in arrangement with LIC Mutual.

But should one invest in these funds? While the needs are special, investment avenues may not be. Child benefit plans are essentially balanced funds that need a long-term commitment. However, most funds are relatively young and hence, have a little track record.

Since such investments are largely meant for the long haul where investors are looking for a horizon of 10 years and above, invest in a diversified equity fund with periodic monitoring because equities are the best performing asset class in the long-term. Further, you can turn conservative and shift to a bond fund or a monthly income plan with a predominant exposure to debt as you approach your target period. This will help you avoid the volatility, associated with equities in the short-term.

Source: Value Research

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