Fidelity will launch a children’s fund. It is actually a hybrid fund — which is all the rage now

Saving for a child's future is high on every parent's agenda. Since the best long term investment products are equities and equity funds, it is a valid marketing idea for fund companies to come up with a pure equity fund that secures your child's future. But Fidelity has gone one step further. It has come up with a fund that will promote savings and will generate long-term returns through hybrid investments that are supposed to cater to different stages of your child's life.

Fidelity Mutual Fund has filed an offer document with market regulator Securities and Exchange Board of India (SEBI) for an open-ended hybrid plan called 'Fidelity India Children's Plan'. The fund will consist of three schemes - Education Fund, Marriage Fund, and Savings Fund. The Education Fund will be benchmarked against the BSE 200 Index (70%) and the CRISIL Composite Bond Fund Index (30%) and will park 70% of its net assets in equity and 30% in debt. The Marriage Fund will invest a minimum of 65% corpus in equity; up to 25% in gold exchange-traded funds (ETFs) and up to 10% in debt and money-market instruments. It will be benchmarked against the BSE 200 Index (70%), gold prices (20%) and the CRISIL Short Term Bond Fund Index (10%). The Savings Fund will invest its entire corpus in debt and have CRISIL Short Term Bond Fund Index as its benchmark. The Education and Marriage Funds will carry a 3% exit load if redeemed within 1 year; 2% if redeemed before 2 years and 1% before 3 years. The Savings Fund will have 1% exit load if redeemed before 1 year. Investors can invest a minimum of Rs5,000 per application.

The first two schemes are hybrid schemes or multi-asset schemes as the jargon goes. They invest in three different assets at the same time. Religare Mutual Fund was the first fund house to enter this arena by launching a scheme in April 2010 called Religare Monthly Income Plan (MIP) Plus, that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments.

The scheme invests 65%-90% in debt instruments; up to 25% in equity and 10%-35% in gold ETFs. Subsequently, Taurus Mutual Fund launched an open-ended income scheme called 'Taurus MIP Advantage' fund and Canara Robeco launched its own hybrid plan called 'Indigo Fund'.

Industry experts say that these funds are being launched to provide multiple exposures to investors during different market conditions so that they do not need to look for investing in different funds to hedge their portfolios.

"The reason why fund houses are launching hybrid products is to provide investors exposure to low co-related assets. So if you have a period when equity is not looking bullish then gold will take care of it. Similarly there are phases were equity is doing well but gold is not. At any given point of time if you are able to swing the assets in the right direction, then your portfolio will pay off due to the existing strategy," said a marketing head of mid-sized fund house. 

Should you go for Fidelity's fund? A simple equity diversified fund from Fidelity held over the long term would be good enough. Look at the performance of 12 existing schemes dedicated to the theme of child plans. These are HDFC Children's Gift Fund, ICICI Prudential Child Care Plan, LIC Children's Fund, PRINCIPAL Child Benefit, SBI Magnum Children Benefit Plan, Tata Young Citizens Fund, Templeton India Children Asset Education Plan, UTI Children's Career Balanced Plan and UTI-CCP Advantage Fund. Out of these, only seven funds have beaten their benchmarks since inception.

The best performer in this category is ICICI Prudential Child Care Plan (Study Plan) which posted a compounded annual growth rate (CAGR) NAV return of 12.70% when its benchmark CRISIL MIP Blended Index rose 8.55% since the fund's inception. The scheme was launched in September 2001. PRINCIPAL Child Benefit (Career Builder Plan) launched in January 1998 has been the second top performer. It posted 19.30% CAGR NAV return when its benchmark CRISIL Balanced Fund Index yielded 15.86% return.

ICICI Prudential Child Care Plan (Gift Plan) has not provided great gifts to its investors. The fund launched in September 2001 has posted a CAGR NAV return of 22.90% while its benchmark has advanced 39.86% since the fund's inception.

Similarly, UTI Children's Career Balanced Plan's career seems to be bleak. The fund launched in December 1995 has posted an NAV return of just 2.70% while its benchmark CRISIL Balanced Fund Index rose 15.86% since the fund's inception. All these funds have been handsomely beaten by the top equity diversified funds.