Child-care mutual fund schemes losing sheen

MUMBAI: Child-care schemes of mutual funds are losing popularity among investors after almost two years of steady inflows. While a section of the investors have stopped their monthly investments in these schemes, some others have pulled out of this product as returns have been lower-than-expected and higher taxes threaten to eat into gains.

Assets under management (AUM) of child-care plans offered by seven fund houses have remained stagnant at around. Rs 5,000 crore from the start of 2015. The AUM is not showing a decline despite the outflows because of the surge in the overall market. As hybrid products, these schemes invest in a mix of debt and equity. Child funds with more than 65% equity allocation are classified as equity funds for taxation.
Funds with a higher debt allocation are classified as debt funds for taxation. “Child funds which are debt-oriented lose out on the taxation front, after the new tax laws came into place,” says Jitendra Solanki, a certified financial planner. So if an investor withdraws before three years, and is in the highest tax bracket, he would end up paying 30% tax. Wealth managers said some of these investors are shifting the money to accomplished balanced plans. In a balanced fund, after one year, an investor pays zero capital gains tax on selling.

“Balanced funds have higher flexibility as they do not have a lock-in period. Since their size is large enough they merit higher attention from the key persons of the fund house,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. He recommends balanced funds to investors to meet their goals for children. But, investors are not pulling out in a big way yet. “Often investors have a tendency to redeem their investments in case of liquidity needs, but with the fund’s name clearly defining the objective- financial planning for your child, it attaches a certain emotional value to the investment, helping parents to refrain from redemptions,” says S Naren, CIO, ICICI Pru MF.