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.

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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. 

  1. 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. 

  2. 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.

  3. 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%. 

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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.

The Final Word!

Child schemes with high equity exposures are great investments that fetch good returns. Hence, parents with regular jobs and some time for investments should go for Child Care plans.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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