Mr. Tushar Pradhan holds an MBA degree from the University of Hartford, USA. Before joining HDFC Asset Management Company, Mr. Pradhan was associated with HDFC Ltd.; at HDFC Treasury he handled various investment advisory functions.

Presently, Mr. Pradhan is Senior Fund Manager at HDFC AMC and manages HDFC Children’s Gift Fund and HDFC Balanced Fund amongst others. In an exclusive interview with Personalfn, Mr. Pradhan speaks on various facets of child plans including their investment strategy and their utility in the present day environment.

Pfn: What sets apart an investment made in a child plan vis-à-vis one made in a conservative balanced fund?

Mr.Pradhan: Child plans by design are similar to balanced funds. However, the differentiating factor is the selection of stocks and the churn in the portfolio. Typically the child fund manager selects companies that display long term potential as opposed to short-term upsides, which any other balanced fund is free to exploit.

Pfn: Does a fund manager vary his management style while handling a child plan? Are there any additional pressures or responsibilities?

Mr.Pradhan: The fund manager endeavours to narrow his investible universe only to such companies that display superior opportunities for growth in the long term and have capable management that trade at reasonable valuations. While handling a child plan extra care is taken to ensure that the churn in the portfolio is kept low and very large volatility is avoided. Most parents aspire to see an NAV that is slowly but steadily growing as opposed to a sharply volatile NAV. The fund manager aspires to satisfy this need of the investor. A look at the past performance of the child plans highlights this aspect, but past performance is no guarantee for future performance.

Pfn: Investing in a child plan requires a high-level of discipline on the part of the investor considering the long tenure. What are your views?

Mr.Pradhan: I agree that only by following a high level of discipline can the long-term objectives can be met. I also agree that this discipline be part of investing for the long term, especially in the case of children’s funds. Children plans like HDFC Children Gift Fund for instance, follow the asset allocation discipline strictly and even in times when the equity markets push valuations above the allocated percentage, efforts are taken to reduce the levels to come back to the prescribed limits. This in the short term may come at the cost of better performance. But in the long term it is a more prudent policy to follow.

Pfn: How does a child plan compare vis-à-vis investments in PPF, NSC, which offer tax benefits along with assured returns?

Mr.Pradhan: Children plans also come with their own tax advantages, however the major difference between PPF and NSC and such funds is that they are assured returns schemes whereas children’s savings mutual fund schemes do not have any assured returns.

The tax advantage available to donor/parent in the CGF schemes is as follows: If a parent donates (gifts) a sum of money in the name of the minor child then the child when he/she turns into an adult can use the capital gains in his name. In other words the appreciation will not be taxed to the parent who otherwise in other schemes will have to bear the incidence of capital gains on his own account. However, if the parent redeems the fund before the child attains 18 years of age, the capital gains benefit does not apply.

Pfn: How do child insurance plans compare with child mutual fund schemes?

Mr.Pradhan: Child insurance schemes are insurance products and not investment products. The potential returns in mutual fund schemes over such a long period of time historically have shown much higher returns. (Past performance is no guarantee for future performance).

Pfn: Your views on equities as an investment option for children?

Mr.Pradhan: Ideally, equities represent the best asset class for saving for children since they have inherently the best match available. It is proven the world over that equities as a class delivers the highest returns over a long period of time (15+ years) as long as investors stay invested. Since money saved for a child’s education remains invested over such periods of time regardless of short-term performance, the asset class has the best opportunity of delivering the required result. Of course, aspects such as superior stock selection, investment discipline and constant review have to be adhered to.

Pfn: Why not 100% equity funds for children, given that equities do well over the long term and children have age on their side?

Mr.Pradhan: Children plans provide the ideal environment where equity exposure is taken as well as complemented with debt investments keeping in mind the requirement of the parent for lesser volatility. So while equities can be an ideal asset class for saving for children, it may not always be the smoothest at times. Thus a blend of equities and debt delivers an optimal fit.

Pfn: Any tax advantages of investing in a child plan?

Mr.Pradhan: The tax advantage available to donor/parent in children plans/schemes is as follows: If a parent donates (gifts) a sum of money in the name of the minor child then the child when it turns into an adult can use the capital gains in his name. In other words the appreciation will not be taxed to the parent who otherwise in other schemes will have to bear the incidence of capital gains on his own account. However if the parent redeems the fund before the child attains 18 years of age, the capital gains benefit does not apply.

Pfn: If a retail investor with a surplus of Rs 100,000 was to build a portfolio for his child, how should he go about allocating the money?

Mr.Pradhan: The exact allocation would depend on the child’s age. But ideally for a child between 0-3 years the following portfolio can be designed:

• Rs 50,000: Equity or equity related products (mutual funds)
• Rs 30,000: A long term fixed deposit
• Rs 20,000: Liquid funds

This is assuming that the child may require some interim liquidity from time to time. Costs of maintaining the portfolio can be high as well as most gains will be subject to taxes on realization.

However the whole sum may be invested in a children’s fund. The product will come with additional tax advantages as mentioned above with the added benefit of professional management. The fund itself will provide the liquidity at all points of time. The donor also has the option of taking a lock-in.

Pfn: Is there anything you would like to advise retail investors as far as investing is concerned particularly with respect to child plans?

Mr.Pradhan: Saving for children should be taken with the utmost sincerity since costs of education today are much higher that ever before. Please choose plans that are transparent and assess the possibility of the delivery of returns, since investors have been hurt in the past. Nomination facilities and the service angle should not be overlooked.

An example of how costs are projected to increase in the future is given below: The cost of a professional degree is Rs 250,000 today. If a child is one year old already the cost can got to almost Rs 635,000 by the time he reaches 18 years of age (assuming a 6% inflation rate)

A lump sum investment of Rs 200,000 at the rate of 10% will become Rs 879,000 in 15 years time. However, a systematic saving plan of Rs 5,000 a month can accrue to Rs 2.09 m (i.e. Rs 20.9 lakhs) in the same time at the same rate. Note that these are only indicative figures.

Pfn: Going forward, what are the innovations you are looking at with regards to child plan mutual funds?

Mr.Pradhan: The current regulations do allow for some innovations in the existing products but at the moment there are not many ideas that can take root since most of the funds offer such features as a combination already. The endeavour should be to deliver superior returns over the long term in a disciplined manner rather than have myriad attention grabbing ‘extras’. After all, a parent would rather like to see his or her dreams that he or she would had for the child fulfilled as a priority, and this can only come from superior and consistent performance.

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