Child Plans Offer Greater Returns than PPF or FDs

Child Care Plans Offer Greater Returns than PPF or FDs

It is believed that Child care plans that offer market-linked returns fare better than traditional investment plans (public provident fund and fixed deposits). Over the last ten years, these funds have shown to offer an average return of 11% whereas traditional plans have offered returns of around 8% over the same period.

What is the right approach for parents to invest in Child Care Funds?

Analysts advise that during the younger years of the child, parents should invest most of their money in pure diversified equity funds. This gives enough time to the parent to balance out the high risks and enjoy increased returns through the power of compounding. When the child is on the verge of attaining adulthood, the money should then be diverted to debt funds. This would help achieve the goals of their child.

For example, Parents planning a 15-year investment for their children must have increased exposure to diversified equity funds for the first 10 years and then gradually shift exposure to debt funds in the last five years. This works well for parents who have great knowledge of the stock market.

Types of Child Care Funds by Asset Allocation

Asset allocation should be done per your risk profile. Child care funds can be divided into three categories — conservative allocation, moderate allocation, and equity funds.

Conservative Allocation of Child Care Funds

In conservative allocation, investments consist of 20% allocation to equities and the remaining in debt securities.
The scheme provides some exposure to gold as well.
The idea behind such an allocation is to maintain the original capital invested and keep the risk profile low for the investor.
Plans such as HDFC Children's Gift Saving, ICICI Pru Child Care Study Regular Plan, and SBI Magnum Child Benefit Regular Growth follow a conservative allocation approach.
A return of around 7% to 8% can be expected over the long term through such funds.

Moderate Allocation of Child Care Plans

The moderate asset allocation approach adopts a hybrid investment strategy comprising of both equity and debt funds.
You can expect close to 60% of the funds to be invested in equities and the remaining in debt funds.
The returns increase as the exposure to equity increases. The risk profile is also higher as a result.
Childcare schemes such as the HDFC Children's Gift Investment, Templeton India Children Gift Growth, and UTI Children's Career Balanced function on the lines of balanced funds.
You can expect average returns of around 12% in about 10 years.

Equity Funds

Asset allocation in such child care funds is comprised of high-risk investments in equities.
100% of the funds are invested in equities.
The returns in the last 10 years have been around 16%.

Important pointers to keep in mind

Tax Implications - In order to gain the most from their investments, the investors should make themselves aware of all the tax implications of these schemes.

Asset Allocation - While opting for these funds, an important thing investors must keep in mind is asset allocation. If the fund invests more than 65% in equities, then investment made in such a fund is tax exempted, only if it's held for one year.

Systematic Approach - According to analysts, the best way to invest in childcare is to adopt a systematic approach. This involves high exposure to equity in the early years of the child and raising exposure to debt funds in the latter part of the investment horizon.