HDFC Children's Gift Fund: Avoid

Recommendation: Avoid

Suresh Krishnamurthy

INVESTMENTS in the initial public offer of HDFC Children's Gift Fund can be avoided.

HDFC Children's Gift Fund is an open-ended balanced fund targeting investors who want to set aside a portion of their existing savings for the education of their children. The fund has a lock-in period for investments. Units purchased cannot be transferred until the beneficiary is 18 or three years, whichever is later. The beneficiary of the investments is also eligible for personal accident insurance, the cost of which would be borne by the asset management company.

For a prospective investor, the initial public offer of HDFC Children's Gift Fund does have some advantages. It allows him to set aside a portion of his savings which he cannot touch by virtue of the lock-in period. For investors worried about their investment discipline, this is certainly an advantage. It also creates a separate portfolio consistent with a particular investment objective, in this case the education of children.

However, the other features of the offer have the potential to reduce the benefits that the scheme can confer. For one, the lock-in period itself can prove to be a liability. If the scheme performs poorly the investor does not have the option of switching his holdings to other investment options to mitigate the damage. That HDFC Mutual Fund is a relatively new entrant into the mutual funds' arena is also a factor that militates against placing faith now in the ability of HDFC Mutual Fund. Moreover, investing for a fairly long period of time in any investment option without the benefit of liquidity, irrespective of the track record, does not appear a prudent proposition.

Another disadvantage is that the scheme's objective is long-term capital appreciation. This suggests that the fund would not declare dividends. The offer document also does not talk about the declaration of dividends. When dividends are declared the investor has the option of reinvesting the proceeds in the same fund or opt for a different investment option. But, since dividends would not be declared, the investor has to repose his faith in the fund manager to change the asset allocation patterns successfully over the long-term.

Indeed, a well-informed fund manager is likely to arrive at a better asset allocation pattern than a lay investor. However, the lack of dividend declaration does not allow the lay investor to choose between fund managers.

HDFC Mutual Fund has provided investors a route to counter these irritants. The offer document says that it will not ask for proof of age of the beneficiary at the time of both the application and redemption and would take at face value the date of birth mentioned in the application. In that event, an investor can specify a date of birth which will make the investments remain locked only for three years. However, the legality of this manoeuvre is not clear.

Investors likely to utilise this `option' to invest or those opting for a higher lock-in would be better off choosing between the two plans on offer -- Investment plan and Savings plan -- consistent with their needs. Investment plan is an equity-oriented balanced fund which would invest up to 60 per cent in equities, while the Savings plan is a balanced fund which would invest up to 20 per cent in equities.

For investors who would need funds within the next five years or so, the Savings plan is a better option since the objective of financing the education of children is not consistent with the higher risk involved in the Investment plan. In fact, considering the investment objective, investors who propose to remain locked-in for only three years should ideally be looking at a non-equity scheme. On the other hand, if investors propose to remain locked in for a fairly longer-term they can then opt for the Investment plan.

Ideally, it would be better if investors set aside a sum and invest in desired proportions in select equity and debt funds to deal with the vagaries of inflation in education expenditures. That way they can monitor the performance of their investments, change asset allocations consistent with their risk preference and the returns generated by their investments.

Issue highlights

Issue type : Open-ended balanced fund

Sponsors : HDFC

Fund Managers : HDFC Asset Management Company

Issue opened : January 25, 2001

Issue closes : February 2, 2001

Liquidity : Lock-in period exists

Scheme re-opens : Not later than 30 days from offer close