Your queries: Mutual Funds – Given the lock-in period, children’s funds do not offer any advantages

© Provided by The Financial Express The fixed-income exposure can be into accrual funds maintaining a high credit quality portfolio such as banking PSU funds, corporate bond funds, ST Income funds, and medium-to-long term funds.

Should I invest in children-specific products in mutual funds?

—BS Johar

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. 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. Hence, 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.

The category has a wide variation in asset allocation followed by funds with equity exposure ranging from 22% to 98%. Taxation would depend on their equity allocation, as mutual funds investing at least 65% in domestic equities are subject to equity taxation.

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Ideally, an asset allocation-based approach (mix of equity and debt) should be followed for investing which would in turn be linked to your risk appetite and time horizon. 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. Consider 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, ST Income funds, and medium-to-long term funds.

I have been investing in balanced advantage funds but not happy with the returns. Should I switch to large-cap funds?

—Atul Vardhan

Balanced advantage funds (BAFs) are a category of hybrid funds, that follow an asset-allocation approach with the flexibility to invest dynamically into equity, arbitrage and fixed-income based on the fund manager’s views across asset classes. Compared to pure equity funds, these funds are positioned as a lower risk-lower return proposition given their allocation to fixed-income. The performance of both BAFs and pure-equity funds would in turn depend broadly on the performance of the underlying asset classes (equity and/or fixed-income). Hence, you should evaluate the performance of your BAF funds in the context of the same and compare them vis-à-vis their peers to assess their performance. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.

To gain better control over asset allocation in line with the recommended asset allocation, you can consider investing in pure-play equity and fixed-income funds, which would account for your risk appetite and time horizon.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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