For every parent, the security of their child’s future is the first priority. Whether it is education or wedding, every responsibility requires proper attention in terms of financial planning. When it comes to your daughter’s higher education and marriage, long-term planning is required; Mutual Funds can be an ideal instrument for sufficient wealth creation. But there are so many funds available; where exactly should you park your money?
Let us know more about the prerequisites, best mutual funds and how to start your investments:
Best Mutual Funds for Daughter’s Future
Child’s Higher Education, Marriage etc. are categorised under long-term investment goals. In such cases, the investment portfolio is designed in such a way that it helps in accomplishing the desired goals. It is advised to then select schemes wisely with long-term benefits in mind.
Here is a list of 10 best mutual funds for your daughter’s future:
| Fund Name | Category | AUM (Crores) | 7-Year Returns (%) |
| Axis Long Term equity Fund | ELSS | Rs. 21,659 | 5.09% |
| Mirae Asset Large Cap Fund | Large Cap | Rs. 16,734 | 3.92% |
| Axis Bluechip Fund | Large Cap | Rs. 11,824 | 6.70% |
| Aditya Birla SL Tax Relief 96 Fund | ELSS | Rs. 10,073 | 3.12% |
| HDFC Small Cap Fund | Small Cap | Rs. 9,154 | 1.20% |
| Franklin India Smaller Companies Fund | Small Cap | Rs. 6,627 | -1.91% |
| HDFC Children’s Gift Fund | Children’s Gift Fund | Rs. 3,083 | 3.72% |
| Axis Small Cap Fund | Small cap | Rs. 2,507 | 5.52% |
| Motilal Oswal Focused 25 Fund | Large Cap | Rs. 1,237 | 3.47% |
| ICICI Prudential Child care fund | Children’s Gift Fund | Rs. 644 | 2.33% |
(The funds in the table are arranged in descending order according to the Assets Under Management (AUM). Data as on 31-03-2020; Source- Value Research)
Understanding the Investment Approach
Now, let us have an understanding of the different categories of mutual funds which can be concentrated in your investment portfolio.
Child Care Mutual Funds
A children’s gift mutual fund is especially designed to aid the future requirements as a child grows up. Such a fund is categorised under Hybrid or Balanced Mutual Funds. You can opt to invest in a Children’s Gift mutual fund to get long-term benefits.
Advantages of investing:
- A children’s gift fund has a lock-in period of 18 years which ensures that you are investing in a disciplined scheme
- These funds can be risky when the market is facing downturns but the same is offset as the investment horizon is long term
Investing in Large Cap Mutual Funds
Large Cap Mutual funds invest in the equity & equity related instruments of companies with large capitalisation. Basically, if you invest in stocks/shares of companies which have a solid business model and are already established in the market, you will be able to sail through bearish market situations too. Large cap mutual funds are known for generating steady returns and are less risky as compared to small cap and mid cap funds. But, the overall returns may not be as high as that of Small cap funds.
Here is why you can consider investing in Large Cap Funds:
- Less risky as compared to Small Cap and Mid cap Funds
- Large cap funds are less affected by rigorous market movements thereby delivering stability of investments
Related Article: 5 Best Large Cap Mutual Funds 2020
Investing in Small Cap Mutual Funds
Since you are willing to invest for your long-term objectives, investing in Small cap mutual funds can be a good option. Small cap funds are known for generating higher returns but, usually, investors are sceptical while investing in such funds because of the associated high risk.
Of course investing in emerging businesses can be risky but think about it this way, if you are investing for a long time say 10-12 years then your investments will have enough time to grow and give high returns. The longer you keep yourself invested in a small cap, the better returns you will accrue.
What are the benefits of investing in Small cap funds for long term duration:
- When you keep yourself invested for a long-term period, the overall risk involved is eventually normalised
- In small cap funds, the assets are allocated wisely in the companies which have well-defined business models showing clear growth in the future. As compared to large cap companies, these emerging businesses enjoy a larger room for future growth
- Market analysts often fail to give proper attention to small cap companies leading to improper pricing of the stocks. In that case, it becomes beneficial to the investors as they can enjoy high profitability and leverage from the inefficiencies in market pricing
- Small cap Companies are more flexible and are capable of adapting to changes more easily as compared to large cap funds
Also read: 5 Best Small Cap Funds 2020
Investing in ELSS
How about starting an investment where you are able to save on taxes as well? Equity Linked Saving Scheme (ELSS) is the only category of Mutual Funds which allows tax deduction under Section 80C of the Income Tax Act. Implying that investments up to Rs.1.5 lakh are eligible for tax exemption each financial year.
ELSS works under a statutory lock-in period of 3 years which would not be a big issue because you are already working on your long-term goals.
Benefits of investing in ELSS:
- By investing in ELSS, you will be creating wealth and saving on your taxes simultaneously
- Higher returns than many other investment instruments. Equity funds are capable of providing returns as high as 13%-15% if held for periods as long as 12-15 years
Check out the best ELSS Funds for 2020, Here
How to pick the right Mutual Fund?
The first and foremost factor is identifying your financial objective or goal. But, here you have your investment goal defined so we can further analyse other parameters:
- Risk Tolerance
Each mutual fund has a certain degree of risk involved. Majority of investors are reluctant to take market risks but there are investors who are inclined towards generating higher returns even if it comes with high risk. You must always realise your risk tolerance and then select the right funds for your portfolio.
Individuals who are new to Mutual Fund investments and have zero to no knowledge of market functioning can invest in large cap or debt funds which are not too risky. Large cap funds are usually less affected by market volatility because they invest in large companies. Debt Funds invest in Government securities & corporate bonds which are comparatively less risky.
Since you have a long-term investment goal, you can invest in Small Cap Funds or Mid Cap Funds as well. These are known as high risk investments but the degree of risk is balanced when the investments are kept for long term and returns generated are high.
- Analyse the fund’s performance
Analysing and reviewing a fund’s performance over a period of time is important. The past performance of the fund can be a good parameter of judging the potential of a fund. It helps in monitoring the consistency of a fund and distinguishing between the performance of the benchmark and returns accrued by the fund itself. However, do not overlook the fact that a fund’s past performance is not entirely indicative of its future performance.
- Professional Management
A fund manager is like the brain of a portfolio. There are active and passive fund managers. You must not finalise a scheme before determining how your fund will be managed. Fund managers are responsible for executing critical research related to evaluation of a fund’s performance before they form a good portfolio or make changes to it. This implies that your fund manager must be highly experienced. In case of bad management and overlooking downturns, the returns can suffer badly.
How to invest- SIP or Lump Sum?
There are two ways of investing in Mutual Funds- Lump Sum investments and Systematic Investment Plans (SIP). Lump Sum investments are referred to the investment wherein the investor purchases units in one go. On the other hand, SIP allows the investors to deposit a certain amount in the mutual fund scheme at periodic intervals. The choice between these two ways is completely dependent on the investment stance of an investor. If you have idle money which you want to put to good use and have a high risk appetite, you can choose lump sum mode of investment. However, if you are willing to make small deposits over a period of time, SIP should be your pick.
In your case, the objective is your daughter’s education or marriage. Keeping this in mind, it is suggested that you should choose to invest in mutual funds via SIP. Why? Here are some advantages:
- You can avoid the burden of lump sum investments and invest with very little amounts
- Systematic Investment Plans inculcates discipline in investing via regular deposits, which is comparatively more convenient. A fixed amount gets debited every month from your account for investments in the selected fund.
- SIP gives the investors rupee cost averaging benefits. Rupee cost averaging is when more units of a fund are bought when the market price of the stocks/shares is low and lesser units are bought when the prices are high. Thereby, it enables you to lower the average cost of your investment.
- You can also benefit from the power of compounding. Under this concept, the interest earned on principal is reinvested. Consequently, the interest added will also earn interest when reinvested. This implies that your investment will generate earnings not only on principal amount but also on the interest earned subsequently.
- Investors also have the option of topping-up your SIP each year by a fixed amount. This could also earn you more returns in the long term
How to invest in Mutual Funds?
There are different methods through which one can invest in mutual funds:
- Offline mode– Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal– If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment