I have been investing some money in a child plan but the returns are not encouraging. Can I shift the entire amount to a large cap fund in the same fund and what are the costs involved?
Children’s funds invest in a mix of equity and debt instruments with an objective of either wealth or income generation. They are subject to a lock-in of either five years or till the child attains 18 years (age of majority), whichever is earlier. Depending upon the objective, their allocation is tilted towards equity or fixed-income. The category currently has wide variation in the asset-allocation followed by funds with the equity exposure ranging from 21% to 98%. Given the lock-in period with an aim to encourage investors to remain invested, these funds do not offer any benefit to investors relative to other categories. It is advisable to consider other pure-play equity and debt funds to have better control over the desired asset allocation and select funds with a long-term track record.
An asset allocation-based approach (mix of equity and debt) should be followed for investing. A large part of your equity exposure should be allocated to pure large-cap funds, and the rest to mid-cap and small-cap funds. You should also consider allocating some exposure to international equities as they offer exposure to different growth drivers and a hedge against currency depreciation. The fixed-income exposure can be into accrual funds maintaining a high credit quality portfolio such as banking PSU funds, corporate bond funds and medium-to-long term funds.
One should periodically evaluate the performance of the funds in their portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, one may switch to a more consistent one. The taxation for these funds would depend on their equity allocation, as mutual funds investing at least 65% in domestic equities are subject to equity taxation. For ‘equity-oriented’ funds, capital gains in case of holding periods up to one year are termed as short-term gains and taxed at 15% (excluding cess and surcharge).
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to email@example.com.