Child Insurance Plan Vs Mutual Fund Investment

One day my Life Insurance agent approached me and informed me about a child insurance plan.

That insurance policy provided insurance coverage of Rs 10,00,000.

Upon purchase of this child plan, the annual premium payment was Rs 52,000 for next 18 years.

The returns will be affected at the end of 18th year, 19th, 20th, 21st, 22nd and 23rd year.

I was supposed to take the decision of buying this policy in a matter of one week.

Considering the investment horizon was 15+ years, I was confused between child insurance plan vs mutual fund investment

Generally, when it comes to future planning of our child, insurance policy sounds more coherent.

In money matters related to child, one does not take risks.

Hence, when my insurance agent offered me a child plan, I was tempted to grab it immediately.

But fortunately I decided to give it a thought. I asked my agent for a weeks time.

Here I present to you the return matrix of the insurance policy:

YearReturnCumulative Premium Paid @ Rs 52,000/yearReturn in Percentage per annum
18thRs 15,50,000Rs 09,36,000@ 5.1% p.a.
19thRs 01,40,000Rs 09,36,000@ 5.4% p.a.
20thRs 01,40,000Rs 09,36,000@ 5.6% p.a.
21stRs 01,40,000Rs 09,36,000@ 5.8% p.a.
22ndRs 01,40,000Rs 09,36,000@ 5.9% p.a.
23rdRs 04,00,000Rs 09,36,000@ 6.7% p.a.
TotalRs 25,10,000Rs 09,36,000

I am a big fan of equity linked investments. I mostly take the equity route when time horizon is more than 4 years.

Hence was reasonably confused with this insurance policy.

The tenure of the policy in consideration was nearly 18 years.

In this holding period equity linked investment can give higher returns (12% per annum).

The only doubtful point was the certainty of returns. It is true that equity linked investment are volatile.

But this is also true that the longer is the investment horizon, more certain is the expected returns.

If we keep the portfolio well diversified, we can be very sure of 12% returns in India.

But probably ‘very sure’ was not convincing for me. After all it was the matter of my child’s future.

I needed confirmations that my returns are nearly 100% sure.

The insurance scheme was offering a minimum return of 6.7% per annum.

There was no equity linked investment scheme that could guarantee returns with such certainty.

As this money was planned for my child’s future, I wanted to be more sure before taking any decision.

I decided to do the study myself and dig into the history of returns given by mutual fund companies.

I wanted to compare a child insurance plan vs mutual fund with a backdrop of 18 years as time horizon.

My first step was to know what type of mutual funds are available in line with my investment goal (child plan).

With my limited knowledge of equity market, I was sure that I will certainly not for small cap or even mid cap linked equity plans.

But when investment horizon is more than 15 years, riskier investment can give higher returns, right?

But my mind was telling me to take it easy as this money was for my child.

So I decided to narrow down my research to the following types of mutual fund alone.

SlFund CategoryApprox. 5 Year Return by top CRISIL ranked fundsComparative Risk Rating
1Large Cap Fund~ 7.10%High
2Banking and Finance Fund~ 11.47%Medium
3Balanced Fund~ 08.57%Medium
4Long Term Debt Funds~ 07.24%Low
5Monthly Income Plan (Aggressive)~ 07.62%Low

LARGE CAP FUND

I then researched and generated Top 10 Large Cap Funds and their annualized returns

SLFund NameCRISILAUM3YR (%)5YR (%)
1ICICI Pru Focused Bluechip Eqty (G)Rank 13,809.5415.5
2Fidelity India Growth Fund (G)Rank 1292.6513.9
3Fidelity Equity Fund (G)Rank 13,001.08146.1
4UTI Opportunities Fund (G)Rank 11,422.5015.211.6
5HDFC Top 200 Fund (G)Rank 211,189.8212.49.8
6HDFC Index – Sensex Plus PlanRank 283.7811.45.9
7DSP-BR Top 100 Equity – RP (G)Rank 23,119.2711.17.6
8Franklin India Bluechip (G)Rank 24,565.2012.97
9JPMorgan India Equity Fund (G)Rank 2289.611.53.1
10SBI Magnum Equity Fund (G)Rank 2507.62125.7
Average Return7.1

BANKING AND FINANCE FUND

My next step was to research and generated Top 10 banking Funds and their annualized returns.

My logic says that the banks and financial institutions have a very sound knowledge of money management.

Hence the returns they are giving in long term horizon will be sure and above average.

As there was no CRISIL ranking available for research for these banking funds, I decided to rank the fund on basis of their Asset Under Management (AUM).

SLFundsCRISILAUM3YR (%)5YR (%)
1Reliance Banking Fund (G)Not Ranked1,671.4920.414.9
2UTI Banking Sector (G)Not Ranked358.2917.210.3
3Sundaram Fin-Serv. Opp.-RP (G)Not Ranked207.8713.3
4ICICI Pru Bkg & Fin Serv-RP(G)Not Ranked143.9417.3
5GS Bank BeESNot Ranked53.316.89.2
6Religare Banking Fund -RP (G)Not Ranked41.2218.8
7Reliance Banking Fund – IP (G)Not Ranked33.09
8Sahara Bkg & Fin. Services (G)Not Ranked20.3617.4
9Kotak PSU Bank ETFNot Ranked12.0512
10Reliance Banking ETFNot Ranked1117.1
Average Return11.5

BALANCED FUND

As per my investment logic, this type of fund was my instant choice.

But I decided to evaluate other investment option.

My Child’s plan should give me capital protection against inflation and also a small capital appreciation.

A good mix of debt and equity in the portfolio of balanced funds gives me exactly this possibility.

SLFundCRISILAUM3Yr (%)5Yr (%)
1HDFC Prudence Fund (G)Rank 16,040.5517.610.8
2HDFC Balanced Fund (G)Rank 1630.4418.911.8
3Tata Balanced Fund (G)Rank 2329.415.48.6
4Can Robeco Balance (G)Rank 2185.8214.79.2
5Reliance RSF – Balanced (G)Rank 2571.1613.112.4
6ICICI Pru Balanced Fund (G)Rank 2334.1113.65.2
7ICICI Pru E & D-Volatility Adv. (G)Rank 3156.3812.86.1
8FT India Balanced Fund (G)Rank 3208.099.85.8
9Birla Sun Life 95 Fund (G)Rank 3519.0812.38.3
10DSP-BR Balanced Fund (G)Rank 3647.311.57.5
Average Return8.57

LONG TERM DEBT FUNDS

These funds are great for your long term capital protection.

Given a choice I will certainly go for this type of mutual fund after balanced funds.

The main advantage of this fund is above average returns (considering it is debt linked fund) and almost risk free.

SLFundCRISILAUM3Yr (%)5Yr (%)
1Principal Income – Long Term (G)Rank 141.997.38.3
2SBI Dynamic Bond Fund (G)Rank 11,256.418.64.8
3UTI Bond Fund (G)Rank 1824.477.57.7
4Birla SL Short Term Fund (G)Rank 2742.2778.4
5SBI Magnum Income Fund (G)Rank 254.877.15.8
6IDFC Dynamic Bond -RP A (G)Rank 2419.596.39.2
7HSBC Flexi Debt Fund – RP (G)Rank 295.016.8
8Religare Active Income-RP (G)Rank 22.326.45.5
9BNP Paribas Bond Fund -RP (G)Rank 2325.627.3
10HSBC Income Fund – IP (G)Rank 233.316.88.2
Average Return7.24

MONTHLY INCOME PLANS (AGGRESSIVE)

These monthly income plan funds are focused to maximum returns with minimum of risk.

My objective is more or less the same.

The only difference is I do not need that monthly income to support my living, I will simply re-invest the income to maximise the returns.

The reason why this MIP has been tagged as aggressive as its portfolio consists of approx 16% of equity.

So in long term it is possible to get better returns than long term debt funds.

SLFundCRISILAUM3Yr (%)5Yr (%)
1HDFC MIP – LTP (G)Rank 15,878.889.69.5
2Reliance MIP (G)Rank 13,617.771011
3Can Robeco MIP (G)Rank 2293.378.58.6
4DSP BlackRock MIP Fund (G)Rank 2229.398.47.8
5Birla SL MIP II-Wealth 25 (G)Rank 2213.17.66
6ICICI Prudential MIP 25 (G)Rank 2481.5187
7Kotak Monthly Income Plan (G)Rank 339.437.64.5
8Tata MIP Plus Fund (G)Rank 374.497.66.6
9UTI MIS – Advantage Plan (G)Rank 3693.067.57.5
10HSBC MIP – Savings Plan (G)Rank 3241.7787.7
Average Returns7.62

Conclusion

I am a big fan of equity linked investment plan.

Funds linked to Banking/finance companies has medium risk level. I

t is impossible to ignore its long term advantages and certainty of returns specially when time horizon is like 15 years.

I decided to put 35% of money in this fund.

My second choice will be balanced funds.

I decided to put 50% of money in this fund.

Balance 15% I decided to allocated to MIP (aggressive plan) Fund.

Inclusion of MIP will give more stability to my portfolio & returns will also not get compromised much.

In a nutshell I can say that my expected returns will be approximately 9.5% per annum.

(Note: I plan to invest Rs 5,000 per month for my Child’s Future Planning)

% WeightRs per monthFund CategoryApprox. 5 Year Return by top CRISIL ranked fundsComparative Risk Rating
35%1,750Banking and Finance Fund~ 7.10%Medium
50%2,500Balanced Fund~ 11.47%Medium
15%0,750Monthly Income Plan (Aggressive)~ 08.57%Low
Average Return~ 9.5%

1 Comment

  1. Hi Mani,
    Is it old post? Shall i consider to include it in my portfolio ? because i need to have safe ride which is more than 20+ years for my children’s education goal. Please suggest me.

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