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Grown-Up Investment Products by Any Other Name

October 23, 2018

 

Photo by Kris on Pixabay

 

This morning, I came across an interesting article in The Times of India about how investment firms in India are preaching about child investment plans that are essentially just investment plans for adults that have been repackaged for children. Author Dhirendra Kumar, founder and CEO of Value Research, points out that there are no actual benefits to these plans as to children that are different from the manner in which adults' investments would be treated.

 

There’s nothing distinctive about such products. One of the largest 

"child" mutual funds was just a balanced fund of mediocre performance. The sales pitch was that you should invest in it and use the money for your kids' college fees. But, the returns that such funds produce are not made up of money that is especially designed for paying college fees—it's just normal money. Parens would hav3e done much better by investing in a better balanced fund.

 

All this talk makes me think of 529 plans in the United States. Clearly, there are actual benefits for children whose parents have established a 529 plan for them, and these benefits are exclusively for the children rather than being a rebranding of an adult product. The gains on investments in a 529 plan are not subject to any tax as long as they are spent on a child's college education.

 

Kumar's article reminds me that businesses will often seek to penetrate new markets by simply slapping a new name on a product without making any substantive changes. (Kind of like Lego's practice of selling normal Legos to children as toys while pretending that these bricks are anything other than construction kits for creative adults.)

 

The point is if a financial advisor tries to convince you that an investment vehicle has been tailored for children, ask him or her questions to figure out how it would function any differently for children than for adults.

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