It is believed that Childcare plans of mutual fund houses fare better than traditional investment plans (public provident fund and fixed deposits). The mutual funds over the last ten years have shown to offer an average return of 11% on a compounded annual growth rate (CAGR) basis whereas traditional plans have offered returns of around 8% over the same period.
Analysts advise that during the younger years of the child, parents should invest most of their money in pure diversified equity funds. 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.
There are 10 well performing schemes offered by these leading fund houses; HDFC, ICICI, SBI, Templeton, UTI, Peerless and LIC Nomura. These funds can be divided into three categories —conservative allocation, moderate allocation and equity funds. In conservative allocation, the asset allocation is same as in monthly income plans with 20% allocation to equities. Plans such as HDFC Children's Gift Saving, ICICI Pru Child Care Study Regular Plan and SBI Magnum Child Benefit Regular Growth, in a period of 10 years, have provided an average 7.2% return on a CAGR basis
In this category, Peerless MF Child Growth scheme, in operation for less than 10 years, has offered 8% returns in the last three years. The scheme provides some exposure to gold, as well. In the moderate allocation category, childcare schemes such as HDFC Children's Gift Investment, LIC Nomura MF Children, Templeton India Children Gift Growth and UTI Children's Career Balanced function on the lines of balanced funds and have close to 60% of asset allocation to equities.This category has offered average returns of 12.4% in 10 years.
Schemes in the third category (Equity funds) have 100% asset allocation to equities. Schemes such as UTI CCP Advantage Growth and ICICI Pru Child Care Gift Regular Plan have provided returns around 16% in the past 10 years. In order to gain the most from their investments, the investors should make themselves aware of all the tax implications of these schemes.
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.
According to analysts, the best way to invest for childcare is to adopt a systematic approach of high exposure to equity in the early years of the child and raising exposure to debt funds in the later part of the investment horizon.
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 are have great knowledge of stock market.