The Hindu Business Line : IDBI Principal Child Benefit Fund: Switch

INVESTORS who have completed five years in the IDBI-Principal Child Benefit Plan may consider switching to an open-end balanced fund with a superior track record. New investors looking to build up a corpus to meet their children's education expenses may consider a plain vanilla balanced fund rather than the Child Benefit Fund, due to two factors.

One, investors in the fund who choose to exit within three years have to sacrifice about 3 per cent of the NAV to the exit load levied by the fund. The exit load is at 2 per cent if redemption is between the third and the fifth year of investment.

Plain vanilla balanced funds, however, do not usually stipulate any exit load. Second, the very small corpus of the Child Benefit Fund may restrict the manoeuvrability of the portfolio. Over the past two years, the Child Benefit Fund has managed much lower returns than balanced funds such as Zurich India Prudence and even the IDBI Principal Balanced Fund.

A review of the portfolio reveals the following:

On the face of it, the track record of the IDBI Principal Child Benefit Fund since its launch in 1998 looks appealing. The fund has generated a positive return in every one of the years since launch, which is not the case with other balanced funds. The fund has also managed annualised returns of around 10 per cent per annum over this period.

But the fund's track record in the years to 2001 is not really indicative of its long- term performance. For one, until the end of 2000, it does not appear to have had any equity component in its portfolio and was distributed across just a couple of securities.

For instance, by September 2000, the fund held around 30-40 per cent of its assets in just one security — HDFC bonds and the balance of 60-70 per cent in cash. This probably protected the fund against any downside in the equity markets in these years.

Since 2001, the fund has acquired an equity component and has maintained a 50-60 per cent equity exposure, with the balance retained in debt and cash. The portfolio has also been more actively churned than before. By December 2001, 55 per cent of the fund's assets were invested in equities, 36 per cent in HDFC bonds and the balance in cash.

The equity portion now featured 16 stocks. The fund has since maintained an equity portion of between 50-60 per cent, with the balance being retained in debt and cash. In its present form, the fund is comparable to the other balanced funds.

In the two years since the fund has acquired the character of a balanced fund, the fund has generated much lower returns than quite a few of the balanced funds in operation.

For instance, between end of 2001 and now, the IDBI Child Benefit Fund has generated absolute returns of around 18 per cent. But the IDBI Principal Balanced Fund has generated around 35 per cent over the same period.

One factor behind the lower returns on the Child Benefit Fund could be the relatively passively managed debt portfolio. Over the past couple of years, balanced funds have managed high trading gains on their debt portfolio through investments in gilts. But the Child Benefit Plan has stayed away from gilts and has continued to invest its debt portion mainly in HDFC bonds and cash.

The cash component has remained consistently high at 12-15 per cent of the assets. This has probably resulted in returns of a lower order than was available from other balanced funds that dabbled actively in the gilt and debt markets.

Given its relatively small corpus size of around Rs 2 crore, the manoeuvrability of the portfolio could continue to be limited in comparison to other balanced funds.

Fund facts: Launched in January 1998, the IDBI Principal Child Benefit Fund offers two options. The Career Builder Plan allows investors to save through a one-time investment, while the Future Guard Plan allows recurring investments over a target period.

The fund is designed to be a long-term investment option. The fund manager has the leeway to vary the equity portion between 40 and 60 per cent, the balance being invested in debt.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Yokogawa Bluestar: Accept

LIC postpones pension scheme

Three years of equity derivatives: My money, my play

Chickens have hatched, count!

Where is the Sensex headed?

Maruti IPO: An act of faith

Grasim deal may force Gujarat Ambuja hand

Guarding investors against themselves

Notes on the notary

IDBI Principal Child Benefit Fund: Switch

Kotak-MNC: Hold/Avoid fresh exposures