Mutual Fund Scheme for Children

Question: The XYZ AMC has come out with a fund for children; 'The XYZ Children's Plan'. Do you think this is good fund to invest?

Mr. Gerard Colaco: 'The XYZ Children's Plan' is a good fund NOT to invest in. This is a classic case of how an otherwise good Asset Management Company (AMC)/Mutual Fund can come out with a lousy investment product just to appeal to parental emotions to increase its Assets Under Management (AUM).

First of all, there is no such thing as a "children's plan". If someone chooses to do proper financial planning, that individual needs to have funds in just 3 investment accounts - an emergency fund, a retirement fund and a general investment fund.

An emergency fund should be generally be equal to one year's normal living expenses and can be liquidated only in case of emergency. The purpose of an emergency fund is to take care of emergencies, as the name suggests.

A retirement fund should be built up with at least 10 percent of your net take home pay going into it each month. In the Indian context, a retirement fund should be predominantly into equity avenues if you are more than 10 years away from retirement. The purpose of a retirement fund is to take care of your wife and you from the time you retire until end of both your lives.

A general investment fund should be built up with at least 15 percent of your net monthly take home income. A mix of debt and equity can be used here. The purpose of a general investment fund is to take care of all non-normal expenditure from the time the fund is set up, until retirement. A general investment fund can be used for down payment on a house, family vacations, vehicle purchases, child education, marriage expenses of children, etc.

So, in investment or financial planning there is no such thing as a "child plan".

The second foolishness of the XYZ Children's Plan is that investments can be made only in the name of a minor. In India, the law is very clear that any asset in the name of a minor cannot be liquidated, even in an emergency, unless the guardian approaches the court of minors and wards and obtains an order for sale of the minor's assets. Such an order will be granted only after the court is satisfied that such a sale is necessary to provide for the minor's genuine needs.

Right now, investments in the name of a minor in mutual funds can be liquidated even during minority of the holder thereof by the guardian signing the redemption form, because most entities appear unaware of this law. If it is discovered, the government and/or SEBI will certainly plug this loophole and liquidity in such investments will dry up.

Third, once a minor attains majority, the asset becomes the minor's property absolutely, and if the minor so chooses the asset can liquidated and used for any purpose that the minor wants, thereby defeating whatever intention the parents/ guardians had in mind at the time of making the investment originally.

For all these reasons it would be extremely unwise to have investments in the name of minor. What is more important is to build and distribute them judiciously between an emergency fund, a retirement plan and a general investment fund. Various investments and strategies can of course be chosen under each of these categories of investment.

The only reason mutual funds, portfolio managers and insurance companies come out with 'child care plans' from time to time is to appeal to the emotions of parents to provide for their children. Any trick will do, so long as they can collect money from you!