I have invested money in a children’s diet, but the returns are not encouraging. Can I transfer the entire amount to a large cap fund of the same fund and what are the costs involved?
—Sumit Aharwadi

Children’s funds invest in a combination of equity and debt instruments for the purpose of generating wealth or income. They are subject to a lock-up period of five years or until the child reaches 18 (age of majority), whichever comes first. Depending on the objective, their allocation is geared towards equities or fixed income securities. The category currently has a large variation in asset allocation, followed by funds with equity exposure ranging from 21% to 98%. Given the lock-up period designed to incentivize investors to stay invested, these funds offer no advantage to investors over other categories. It is advisable to consider other pure-play equity and debt funds to have better control over the desired asset allocation and select funds with a long-term track record.

An asset allocation (combination of equity and debt) approach should be followed for investing. A large portion of your equity exposure should be allocated to pure large-cap funds, and the rest to mid- and small-cap funds. You should also consider allocating some exposure to international equities as they provide exposure to different growth drivers and hedge against currency depreciation. Exposure to fixed income securities may be in regularization funds maintaining a high credit quality portfolio, such as bank RSU funds, corporate bond funds and medium to long term funds.

The performance of the funds in their portfolio should be periodically assessed against that of their respective peers. If a fund has consistently delivered below-average performance, one can switch to a more consistent fund. The taxation of these funds would depend on their equity allocation, as mutual funds investing at least 65% in domestic equities are subject to equity taxation. For “equity-oriented” funds, capital gains in the event of holding periods of up to one year are classified as short-term gains and taxed at 15% (excluding cess and surcharge).

The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected].