December 13, 2016

Thoughts on “Children’s Schemes”

Last week, I had a conversation with an investor on the subject of so-called “children’s schemes”.  Just in case you’re wondering, these are mutual fund schemes which typically have the words ‘child’ or ‘children’ in their name, and which are claimed to be targeted at conscientious parents planning for their children’s higher education, or even marriage.  He was considering investing in such a scheme and sought my opinion on which scheme to select.

Quite frankly, I was surprised.  It is my view that these schemes primarily exist to attract investors who choose not to understand the nuts and bolts of investing in mutual funds, and who are likely to fall for marketing gimmicks.  Or as one industry insider likes to put it, these schemes are meant for “investors who are overwhelmed by their role as parents”.  In sharp contrast, the investor who approached me is an intelligent person who I have regarded as having a reasonably clear understanding of investing in general, and in mutual funds, in particular.

As we spoke, it emerged that he had been led into believing that these schemes were “too sacred” for any fund house to “screw up”.  As evidence, he shared a sheet that was recently compiled by his advisor, showing the returns given by these schemes over the last 1, 3, 5 and 10 years.  He tried to point out that nearly all these schemes had “consistently given double-digit returns” that were comparable or better than the returns from balanced funds.  According to him, unlike in the case of balanced funds, there were no “poor performers”. 

So why, then, did he need my opinion?

It seemed that the one thing that bothered him was the AUM under these schemes.  As per the data he had obtained, the industry-wide AUM was “a mere 6000 crore” of which over 60% was in a single scheme which he described as an “average performer”.  He wanted my help in figuring out if he was missing something.  As I saw it, there was a lot that was questionable about his thought process.

Firstly, he was erring in comparing these schemes together.  Going by the Value Research classification, these schemes were spread across three different categories based on the extent of their allocation to equities.  Some of the schemes were classified as balanced funds (VR category: Hybrid Equity-oriented) while others were classified as MIPs (VR categories: Hybrid Debt-oriented Aggressive and Hybrid Debt-oriented Conservative) .

Secondly, these schemes have exhibited varying levels of consistency as to their equity allocations.  As an example, over the past 12 months, one scheme has seen its allocation to equities range between 0% and 71%.

Thirdly, contrary to the impression created by the current trailing returns, the yearly returns on these schemes can hardly be described as being consistently in double digits.  Additionally, in line with the equity allocations, there have been wide differences in the returns of individual schemes. In 2015, for instance, the return across these schemes ranged between 10% and –2%.  In 2014, it ranged between 54% and 25%.  In 2011, it was between 5% and -26%.  In 2010, it was between 32% and 4%. 

Lastly, the notion that fund houses will not “screw up” the performance of these schemes is naive and flawed.  Consider this: in the 2008-09 market crash, among the hybrid funds, the two schemes that gave the worst return were both “children’s schemes”.  From peak to bottom, ICICI Prudential Child Care Plan - Gift Plan (I-Pru CCP) fell by over 67% while LIC MF Children Fund (LIC CF) fell by over 75%.  To give those numbers some context, while I-Pru CCP gave lesser returns than 76% of the equity schemes, LIC CF gave lesser returns than 98% of the equity schemes (I included sector funds in my count of equity schemes).

My advice to that investor, then, was to first determine if a hybrid fund was indeed something he wanted to consider.  If so, I suggested that he assess the kind of equity allocation that would be appropriate.  Based upon that, he could shortlist funds and compare them, regardless of whether they were “children’s schemes” or not.

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