Is your child a prodigy? If he isn't, we suggest you make alternative arrangements to ensure his future is nevertheless secure. Investing in a mutual fund child plan is one way.

Often investors are too preoccupied with the objective of clocking a 'return' and close their eyes to the ultimate objective i.e. saving for retirement, for a house, for the child's education and the like. Each of these requires a different investment 'mindset' and fortunately for the investor more often than not, there are investment avenues that cater distinctly to most of these objectives.

For instance, to an individual planning for retirement, you have mutual fund pension plans with a clear mandate to invest with the objective of helping investors save for retirement. Likewise we have children plans/schemes that have a mandate to invest with the objective of creating wealth over the long-term for the child's education.

Of particular interest to the cautious investor is the explicit investment objective of a mutual fund child plan. For instance, Principal Child Benefit Fund 'seeks to generate capital appreciation with the aim of giving lump sum capital growth to the beneficiary (child) at the end of the chosen period'.

HDFC Children's Gift Fund also seeks to provide capital appreciation to the investor (the child in this case). Even more explicit is UTI Children Career Plan's investment objective of 'providing the child on maturity a means to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enable them to set up a home or finance the cost of other social obligation'.

From the parent's perspective having an investment option that works with the sole intent of creating wealth over the long-term for the child can be very comforting.

While to many it may appear that providing 'long-term capital appreciation' is a no-brainer because even the most incompetent fund seeks to do that, there is a subtle difference.

When a diversified equity fund or a balanced fund declares that it wants to post long-term capital appreciation the fund manager does not really have the liberty to make equity investments over the long term.

This is because his fund witnesses daily redemption pressure and investors (existing as well as potential) are constantly monitoring his fund's performance. This tends to force the fund manager's hand and at times he makes investments purely to clock short-term gain to keep investors satisfied and go one up on his peers.

Consequently we witness a mismatch between the stated investment objective (of providing long-term capital appreciation) and the actual investment approach (investing to clock short-term gains).

Now let us understand why this is never a predicament for the child plan fund manager. Child plans have a lock-in period (minimum 3 years in most cases). If the investor (parent) wishes to exit before that, he will incur a load (as a percentage of his investments), which is a deterring factor for most investors.

The child plan fund managers is able to plan his investments better because he knows in advance the redemptions his fund has to meet on a particular day. This affords him a lot of freedom while investing and he can take some serious bets that may be unrewarding over the short term, but can really spruce up growth over the long-term.

So there is harmony in what he seeks to do (provide long-term capital growth) and his actual investment style (long-term stock bets).

What you need to look at before investing in a child plan:

1. More equities should not be looked at with apprehension even if you are risk-averse. Remember this is an investment for your child and not for you. In fact, for a child, a higher equity component is better given that he/she has age on her side.
   
2. The child plan's track record is important. Performance of other equity/balanced funds from the same asset management company is a pointer towards the fund's competence in managing the child plan. And when you look at the child plan's performance, look at long term: 3-year/5-year, not 6-month/1-year.
   
3. The child plan's corpus is not necessarily an important factor. Remember child plans are retail products so even if the fund's net assets are small, you can safely assume most investors are retail just like you, which is unlikely to have a significant bearing on the performance.
   
4. While comparing child plans across AMCs, make sure you are comparing apples to apples. Across the board, child plans have varying equity components, which is what gives a push to the returns of the plan at the end of the day. So make sure you are comparing returns of child plans with the same equity component so as to make an intelligent decision.

While mutual fund investing was always meant to be for the long-term, greed and fear force investors to realign their investment objectives at regular intervals. This in turn forces fund managers to realign their investments.

With the result, the return generated by the fund assumes more importance than it should, and the end objective (house, car, child's education) is forgotten. With the lock-in in child plans, the discipline is enforced and investors are compelled to look at the big picture.

• To plan your child's future, click here.