Top Mutual Funds to Secure Your Child’s Future in 2021
Every parent wants the absolute best for their children, from the best basic amenities to elite high schools and top foreign universities. But contrary to popular opinion, the best things in life are seldom free. So, while you might take the right step and start investing for your child's future from the day they are born, if you are still investing in traditional avenues like bank FDs, Child Endowment Policies or ULIPs, then you are setting yourself and your child up for failure. But don't worry, all is not lost yet. The best way out of this mess is to invest in top mutual funds that could potentially secure your child's future.
In this article, we are going to reveal the list of top mutual funds to secure your child's future. This list of top mutual funds is wholesome, in the sense that we are not sticking to just one category of mutual funds. Instead, our list of top mutual funds to secure your child's future is split across large-cap funds, aggressive hybrid funds, flexi-cap funds, large & midcap funds, and midcap funds. And that's not all. We are also going to reveal the ideal allocation in which you should invest in these mutual fund categories.
But before we reveal the list of the top mutual funds to secure your child's future, here are some startling facts on cost of education in India and overseas:
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Did you know that education inflation in India stands at 11-12%? Yes, as per a report by National Sample Survey Office (NSSO), an average Indian household spends about Rs 12,000 - Rs 18,000 per month on school fees. This is a radical change from Rs 400-Rs 500 spent on school fees 30 years back. And the situation is expected to worsen in future.
The below graph shows the future value of the current average monthly education expenditure of Rs 18,000 incurred by an Indian household, assuming 12% inflation.
Table 1: Rising Education Expenditure in India
(The graph above is for illustration purposes only)
So, if you have a toddler, then be ready to pay as high as Rs 1,73,633 every month after 20 years!
Now you must be thinking that while this seems expensive, even your salary will increase simultaneously. So, you will be able to manage these costs. Unfortunately, you are wrong. In the same survey, it was revealed that the cost of education burgeoned 2.75 times between 2008 and 2014. While, during the same period, the per capita income of an average Indian household increased by only 2.49 times.
This is just the reality of inaccessible domestic education in our country. The situation is far worse when it comes to foreign education.
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As per NSSO, the average tuition fees of top foreign universities has increased by a whopping 16% between 2011 and 2021. Here is what this means for you -
Table 2: Effect of Inflation on Foreign Education
(The graph above is for illustration purposes only)
A postgraduate course worth Rs 50 lakhs today will cost more than double i.e., Rs 1.05 crores in just the next 5 years, assuming a 16% inflation! Whereas, in the next 15 years, you will be shelling out approximately Rs 4.6 crores to secure your child's future.
And mark our words, bank FDs, ULIPs and endowment plans won't get you there, no matter how much you invest or how early you start. The only way to secure your child's future is to invest in top mutual funds. Don't believe us? Then take a look at the below chart highlighting the performance of traditional investment options like bank FDs, ULIPs, Endowment plans against top mutual fund categories.
Table 3: Traditional Investments Vs Mutual Funds to Secure your Child's Future
(Source: ACE MF, PersonalFN Research)
(The graph above is for illustration purposes only)
As you can see, actively managed equity mutual funds have managed to outperform traditional investment options by a vast margin. So, if you are investing in only traditional investment options for your child's future, then you are making a huge mistake.
But, why are we so adamant on equity mutual funds to secure your child's future? Isn't any investment option good as long as you start early? Unfortunately, No!
A majority of parents harbor this misconception that selecting an investment option is immaterial as long as they start early. But this is not true. Starting early is only half the battle and the outcome is majorly dependent on which investment option you choose to secure your child's future.
The below chart shows the future value of a monthly investment of Rs 25,000 over a period of 10 years in traditional investment options vs mutual fund categories.
Table 4: Corpus Accumulated in Traditional Investments Vs Mutual Funds
(The graph above is for illustration purposes only)
As you can see, with everything else like investment horizon and investment amount being constant, the difference between the corpus accumulated in bank RDs and Midcap mutual funds is 105.73%.
105.73% is the notional loss that you would incur by not investing in top mutual funds to secure your child's future.
By now you must have come to the harsh realisation that while traditional investment options give you safety and comfort, they will not help you secure your child's future. This is why you must invest in PersonalFN's list of top mutual funds to truly secure your child's future.
As we discussed earlier, our list of top mutual funds to secure your child's future is split across the following categories -
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Large-cap funds
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Aggressive Hybrid funds
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Flexi-cap funds
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Large & Midcap funds
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Midcap funds.
We have purposely not included solution-oriented children's mutual funds in our list of top mutual funds to secure your child's future, since they have failed to impress with either their stock selection or their short or long-term performances.
Lackluster Performance of Solution-Oriented - Children's Fund
Table 5: Performance of Children's Funds
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
For instance, as of 3rd September 2021, SBI Magnum Children's Benefit Fund-Savings Plan has managed to generate a paltry return of 23.43% in the last one year compared to 49.18% returns generated by the large cap funds category. So, as a parent you are better off investing in a large cap fund than a dedicated children's mutual fund.
Another thing to note here is that our allocation to various top mutual fund categories is solely dependent on the time horizon of these goals. Hence, it is recommended that you analyse and align your risk profile with the various top mutual funds before investing in them to secure your child's future.
Let us now finally take a look at the top mutual funds to secure your child's future if your investment horizon is 3-5 years.
Top Mutual Funds to Secure your Child's Future - 3-5 Years
Since a 3-5-year investment horizon is quite fleeting, you have fewer years to negate short-term mistakes and hence we have recommended a mix of large cap mutual funds and aggressive hybrid funds. While large cap mutual funds will provide stability to your portfolio, aggressive hybrid funds will bring in the much-needed high growth alongside additional stability courtesy the debt component of their portfolios.
As per the Securities and Exchange Board of India (SEBI), Large cap mutual funds invest minimum 80% of their corpus in equity and equity related instruments of large cap companies which are the top 100 companies listed on the exchange in terms of market capitalization.
These companies are market leaders with strong brand recall value, quality management, tried and tested products, sustainable business model, high cash reserves, and economic moats. All this helps them bear up against economic shocks.
The below chart shows the performance of large cap mutual funds across different time frames.
Table 6: Performance of Large Cap Mutual Funds
Data as of 3rd September 2021 (Source: ACE MF, PersonalFN Research)
As evident, over the long-term i.e., 5+ years, large cap mutual funds have generated an average return of 14.07% as of 3rd September 2021, which is decent considering they undertake the lowest risk in the equity mutual fund segment.
Our top mutual funds recommendation to secure your child's future in large cap category are -
Returns as on 3rd September 2021
(Source: ACE MF, PersonalFN Research)
[Read More: Best Large Cap Mutual Funds to Invest in 2021]
Our next two top mutual funds for an investment horizon of 3 to 5 years belong to the Aggressive Hybrid Funds category.
As per the SEBI's definition, aggressive hybrid funds invest 65% to 80% of their total assets in equity and equity related instruments while 20% to 35% is invested in debt instruments like corporate bonds, debentures etc. This helps investors benefit from the upside potential of equities whilst the debt portion of the portfolio offers stability. Aggressive hybrid funds have generated consistent returns across short and long-term investment horizons.
Table 7: Performance of Hybrid Mutual Funds
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
Even with a 20-35% allocation to debt instruments, aggressive hybrid funds have managed to clock a 10-year compounded annual growth rate (CAGR) return of 13.54% as of 3rd September 2021.
Our recommended top mutual funds in the aggressive hybrid fund category are -
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
[Read More: Best Aggressive Hybrid Mutual Funds to Invest in 2021]
If you are looking to secure your child's future and your investment horizon is 3-5 years, then we recommend the following allocation -
Top Mutual Funds to Secure your Child's Future - 5-10 Years
When your investment horizon is 5-10 years, you have the leeway to invest in slightly risky mutual fund categories as there is ample time to recover your losses. Our recommended mutual fund category to secure your child's future for a time horizon of 5-10 years is -
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Flexi Cap Funds
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Large Cap Funds
Flexi Cap Mutual Funds are a fairly new mutual fund category, having been introduced by SEBI in 2020. It is similar to Multicap funds in the sense that the fund invests across large, mid and small cap stocks but there is a slight difference.
[Read More: Multi-cap Fund v/s Flexi-cap Fund: Which is a Better Fit for Your Portfolio?]
Multicap mutual funds have a strict mandate to invest minimum 25% in each large, mid and small cap stocks. But flexi cap funds do not have such restrictions. They can invest a minimum 65% of their corpus in stocks across the three segments dynamically.
But this freedom comes with slightly higher risks and hence flexi cap funds are suitable only for an investment horizon of at least 5-10 years.
Table 8: Performance of Flexi Cap Mutual Funds
Data as of 3rd September 2021 (Source: ACE MF, PersonalFN Research)
As evident from the above graph, in the last one year, flexi cap funds have generated superior returns of 53.64% as of 3rd September 2021 compared to large cap and aggressive hybrid funds.
Our recommended top mutual funds in the flexi cap fund category are -
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
[Read More: Best Multi Cap/Flexi Cap Funds to Invest in 2021]
As a parent, if your investment horizon is between 5 to 10 years, then you should invest in large cap and flexi cap fund in the following allocations -
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Large Cap Funds - 60%
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Flexi Cap Funds - 40%
Let us now move on to the ultra-long-term investors with an investment horizon of more than 10 years.
Top Mutual Funds to Secure your Child's Future - More than 10 Years
When it comes to investing, the mantra is quite simple - The more risk you take, the higher returns you make. And you will be able to absorb high risks only when your investment horizon is ultra-long-term i.e., more than 10 years, as it puts you in a sweet spot on the risk-return scale. A long-term investment horizon allows you to take healthy exposure to risky mutual funds categories like midcap funds. This is because you have more than enough time to absorb and recoup short-term losses.
So, our top mutual fund categories to secure your child's future if your investment horizon is more than 10 years are -
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Large Cap Funds
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Flexi Cap Funds
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Large & Midcap Funds
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Midcap Funds
While we have discussed, at length, about large and flexi cap funds, let us now shine the spotlight on large & midcap funds.
As per the SEBI's definition, Large & Midcap Funds must invest a minimum 35% of their total assets in equity and equity related instruments of large cap companies and at least 35% in midcap stocks.
Midcap stocks are the large-cap stocks of tomorrow. They are 101st to 250th stocks listed on the exchange with regards to market capitalisation. They are riskier than large cap companies as they do not have stable cash flows or huge cash reserves. They are highly exposed to market risks and economic shocks and hence suitable for only aggressive investors with a long-term investment horizon.
But the beauty of large and midcap funds is that it gives you partial exposure to midcap stocks whilst keeping the overall risk low, courtesy large cap stocks.
Table 9: Performance of Large & Midcap Mutual Funds
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
Our recommended top mutual funds in the large and midcap fund category are -
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
[Read More: Best Large and Mid-Cap Mutual Fund to Invest in 2021]
And finally, we move to the riskiest mutual fund category in our list of top mutual funds to secure your child's future, i.e., Midcap funds.
While large & midcap funds just give you a flavour of the highly risky midcap segment, investing in pure midcap funds is akin to diving into the deep end of the ocean.
As per the SEBI's definition, Midcap mutual funds must invest a minimum 65% of their corpus in equity and equity related instruments of midcap companies. Midcap companies are up and coming entities with limited brand recall value, cash reserves and uncertain cash flows.
[Read More: Mid-cap and Small-cap Funds are on a Dream Run. Should You Invest?]
This is why midcap funds figure among the some of the worst hit mutual funds during a bear market but tend to outperform their competitors in a bull market. Midcaps are your typical 'high risk- high return' funds, provided you stay invested in them for the long-term so as to negate the short-term bear market volatility.
Table 10: Performance of Midcap Mutual Funds
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
Needless to say, midcap funds have generated stellar returns of 65.96% in the last one year as of 3rd September 2021. Also notice that in the long term, i.e., 10 years, whilst risky, midcap funds have generated highest returns compared to all other mutual fund categories excluding small cap funds.
Our recommended top mutual funds in the midcap fund category are -
Data as of 3rd September 2021
(Source: ACE MF, PersonalFN Research)
[Read More: Best Midcap Funds to Invest in 2021]
If your child's financial goal is more than 10 years away, then we recommend the following allocation among the top mutual funds -
This concludes our list of top mutual funds to secure your child's future. All the funds mentioned in this list have been handpicked by experts based on PersonalFN's S.M.A.R.T Score Matrix -
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S - Systems and Processes
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M - Market Cycle Performance
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A - Asset Management Style
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R - Risk-Reward Ratios
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T - Performance Track Record
If you are serious about securing your child's future, then we would recommend you to consider PersonalFN's unbiased and unparalleled research service, FundSelect.
Under FundSelect, our aim is to recommend equity funds which have the potential to generate superior returns and beat the category average and broader market index like S&P BSE 200 in the long run.
The below chart highlights FundSelect's superior performance against S&P BSE 200 as of 31st December 2020.
(Source: ACE MF, PersonalFN Research)
Performance as on December 31, 2020;
Past performance is no guarantee of future results
So, don't miss out on this golden opportunity and grab PersonalFN's flagship product, FundSelect at this very instant.
Warm Regards
PersonalFN Content & Research Team
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