Peerless Child Plan: A me-too product that will deliver disappointing returns  

March 24, 2011

The scheme will invest mainly in debt. Therefore, it will not beat inflation and will not help your child much!

Moneylife Digital Team

Peerless Funds Management Co Ltd has launched an open-ended scheme called Peerless Child Plan. The Plan, a hybrid scheme of debt, equity and gold, was launched quietly two weeks ago and closes on Friday. Is it worth looking at?

The benefit is that an investor gets a combined investment option in three asset classes. But sadly, it is an exact replica of Fidelity's India Children's Plan. Before this, Taurus Mutual Fund launched an open-ended income scheme called 'Taurus MIP Advantage' fund and Canara Robeco launched a hybrid plan called 'Indigo Fund'.

Religare Mutual Fund was the first fund house to enter this asset allocation product in April 2010, with a scheme called Religare Monthly Income Plan (MIP) Plus that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments.

The investment objective of the Peerless Child Plan is to generate long-term capital appreciation through a portfolio of fixed-income securities, gold exchange traded funds (ETFs) of other mutual funds and equity and equity-related instruments. The Plan will invest 60%-80% in debt and money market instruments, 5%-35% in equity and 5%-35% gold ETFs. The scheme carries a 1% exit-load if redeemed before one year. It is benchmarked against the CRISIL MIP Blended Index and the price of gold (neutral allocation: 85:15).

Saving for a child's future is high on every parent's agenda. Since the best long-term investment products are equities and equity funds, it is a valid marketing idea for fund companies to come up with a pure equity fund that secures your child's future. Thus, a simple equity diversified fund held over the long term would be good enough. But Peerless will divide its investment in debt, equity and gold ETFs.

Debt and gold will only drag down the performance. Returns from debt cannot keep up with inflation. And while it is a common belief that gold offers good returns over the long term, this is simply not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme.

Suppose 60% is invested in debt, 35% in equity and 5% in gold. If the debt part gives a maximum return of say 9%, the return from the debt part of the portfolio will be around 5.4%. If equity gives a return of around 15%, the return from the equity part of the portfolio would be 5.25%, and if gold crashes the return from gold will be zero to negative. Thus the overall return from the portfolio would be just 10.65%. Thus for just that extra 1.65% return more than the bank fixed deposits, you would pay 2% fees to the fund manager, with the only advantage that the return from the scheme may fetch a slightly lower tax.

Equity mutual funds are the best financial product to beat inflation in the long run. Certainly there is a huge risk involved in equity investment too, such as entry/exit timing, stock selection and as well as portfolio churning. But in the long run it gives the highest-inflation adjusted return. That apart, it is bit strange to see a long-term objective fund investing a majority of its asset in debt. After all, debt is one of those assets which have no growth factor. The return from debt is completely dependent on the prevailing interest rate.

We think the fund is merely designed to attract safe money. Since gold prices are rallying, the fund house has decided to add it to the fund. But gold has been rising for years now. To extrapolate that trend into the future would be imprudent. With so many flaws, we are simply not sure who the fund is meant for. Asset allocation schemes may claim that through one scheme you are able to invest in three asset classes. But this will always lead to sub-optimal returns. It's always good to invest in specific products based on your expectations from that particular asset class that is in line with your financial goals.