Fund Call. Tata Young Citizens’ Fund: A good way to save for Junior

Seven mutual fund companies — Axis, HDFC, ICICI Pru, LIC, SBI, Tata and UTI — offer schemes that are specially designed to help investors save for their child’s future expenses, like education, marriage, etc.

These funds allow investment only in the name of a minor child — less than 18 years old — on the date of the investment. The applicant can be the parent, step-parent, grand-parent, adult relative or friend. These funds give investors the option to invest in equity-oriented or debt-oriented plans. Within the funds in this category that allocate 40-60 per cent of their assets to equity, Tata Young Citizens’ Fund has been an outperformer for most of the time frames.

It registered SIP performance of 13, 14 and 13 per cent of annualised returns for three, five and seven-year periods, respectively, while the category generated average returns of 11, 12 and 12 per cent, respectively.

Investors with medium risk appetite could invest regularly in the fund to generate wealth over the long run.

Features of the plan The fund allocates up to 50 per cent investments in equity and the rest in debt. The fund provides two options — compulsory lock-in and any-time exit.

Under compulsory lock-in, the money will be held in the fund till the maturity of the child (i.e. 18 years of age) and after maturity, units may be redeemed by the child. Do note that lock-in does not imply tax benefit under Sec 80C.

Under the any-time exit option, the investment will not be locked-in and can be redeemed at any time, subject to the applicable exit load. The fund charges exit load of 3 per cent if redeemed before three years, 2 per cent if redeemed between three years and seven years, and 1 per cent if redeemed after seven years. Exit load is nil after the child becomes a major.

Given its investment mandate of allocating around 50 per cent of its assets to equity, the fund is considered as non-equity as far as taxation is concerned. Hence the units of the fund redeemed only after 36 months are eligible for long term capital gain tax, levied at 20 per cent with indexation.

Portfolio On the equity side, the fund favours well-managed businesses trading at a reasonable price.

The large vs mid and small-caps ratio stood at 76:24 as per the fund’s latest portfolio. Financials, Automobiles and Services are the top three sectors. The risk in the debt portion is mitigated well as the fund invests mostly in highest rated AAA corporate bonds (19 per cent) and G-Secs (23 per cent).

The fund has taken active duration calls. It has reduced its average maturity to five years from 10 years over the last two years, indicating a cautious approach.

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