Fund Focus: UTI Children's Career Balanced Plan

Goal based fund leverages little known tax break

Rajnish Kumar, Senior VP Products, UTI MF

12th August 2016

In a nutshell

Its not just a top decile performance that makes UTI Children's Career Balanced Plan an interesting fund. This fund has a scholarship option that leverages the little known Sec 10(16) of the Income Tax Act, to effectively deliver tax free returns despite having a 60% debt component. Steady performance, conservative asset allocation, great tax efficiency and a product construct that is fully aligned with saving for children's education - advisors have 4 good reasons to seriously consider this unique solution.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: Is the asset allocation fixed at 60 debt and 40 equity or do fund managers tactically move it around depending on their market views? How much leeway on asset allocation do the fund managers have?

Rajnish :The fund has a static allocation to debt ( Min -60% Max - 100%) and equity (Min - 0% and Max - 40%). The fund manager based on overall limit as stated above allocates assets to run the portfolio. Historically, the asset allocation calls are based on the overall market conditions ( debt& Equity ) and fund manager's expectations from the micro & macro-economic environment. The fund manager does have leeway in terms of taking strategic / tactical calls in alignment with the long term objective of the scheme.

WF: The fund has a growth option as well as a scholarship option. Please take us through the scholarship option and its tax advantages.

Rajnish: The scheme offers two options i.e. Scholarship option and growth option for the investors. Under the growth option, full or partial unit holding can be redeemed by the beneficiary. The dividend generated if any will be ploughed back and will be reflected through growth in the NAV.

Under the Scholarship option - scholarship is paid to the beneficiary after he/she attains the age of 18 years to meet the cost of his/her education. The applicant can choose at the time of joining the plan the number of installments of scholarships which could be 4,5,6,7 or 8 payable at yearly or half yearly intervals. Over the chosen period the unit holding will be completely liquidated. The payment to beneficiaries will be made in April/October every year. The units to be redeemed for each payment will be arrived at by dividing the outstanding unit holding in a folio before the commencement of scholarship payment by the number of installments indicted by the applicant/beneficiaries.

Notably, under section 10(16) of the Income Tax Act, 1961, Scholarship granted to meet the cost of education does not form part of the total income of the beneficiaries and hence enjoys tax exemption. However, should the beneficiary discontinue education, the exemption under section 10(16) will cease.

WF: Does one have to submit any proof of education expenses to avail tax free withdrawals in the scholarship option?

Rajnish: Yes, one has to submit proof to income tax authorities to claim tax exemption under section 10 (16) of the Income Tax Act, 1961 under the scholarship option.

WF: Is there a fixed age at which the scholarship option gets triggered or can the investor choose the age?

Rajnish: The payment under Scholarship option gets triggered once the beneficiary attains the age of 18 years.

WF: Are the funds locked in prior to triggering the scholarship payouts or can they be redeemed after incurring an exit load?

Rajnish: Looking into long term investment objective of the scheme, it's advisable to remain invested till the age of 18 years of beneficiaries.However, applicant / beneficiary has an option to redeem the units at his discretion after incurring the exit load applicable under the scheme. The exit load will be as under,

Less than 2 years - 3%

Greater than or equal to 2 years & less than 4 years - 2%

Greater than or equal to 4 years & less than 5 years - 1%

Greater than or equal to 5 years - Nil

WF: Since when has the scholarship option been offered in this scheme and how many investors have availed of this?

Rajnish :The scholarship option under the scheme is on offer since its inception i.e. July 1993. However,may be due to lesser product awareness most of the assets in the scheme are under growth option. As the product awareness increases and investment in children segment picks up, we can see growing acceptance for this particular option.

WF: How are the equity and debt components managed in terms of strategy and portfolio composition?

Rajnish: The fund assets ( equity and debt) are primarily managed with a long term investment perspective. The equity investments are made using a bottom up approach in companies having sound business plans, capable managements, healthy return ratios, and potential to excel in mid to long term time horizon. The debt portion is constructed and managed with the objective of providing stability to returns of the scheme.

WF: This seems to be a very tax efficient and sensible option to save for children's education. What are your plans to further popularize it?

Rajnish: UTI Mutual fund has two offerings in the segment i.e. UTI Children'sCareer Plan ( Balanced) and UTI Children's Career Plan - Advantage Fund . UTI CCP balanced fund is a debt oriented while the UTI CCP Advantage Fund is a equity oriented fund. This gives flexibility to investors to choose from based on his /her risk - returns profile and age of the beneficiary child. UTI CCP Balanced fund is the largest fund in the child segment in the industry with a folio base of more than 20 lacs. Going forward, we aim to increase the scheme penetration specially in B 15 centres. The product awareness will be our key focus area and we will be using our extensive network of channel partners to reach out to investors. Also, we look forward to increased correspondence with our existing investors for incremental allocation to the scheme.Systematic Investment Plan ( SIP) would be a right mode to popularize for the investment into the scheme.

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