If only they had bought Hynix… Children's funds charge high fees but de...

Children’s funds, designed to help parents invest for their children’s future, have significantly underperformed major domestic and overseas market indices over the long term.

Their portfolios are also largely made up of ordinary large-cap KOSPI stocks, while their fees are higher than those of exchange-traded funds (ETFs). This has led to criticism that there is little clear reason to classify them as long-term investment products specifically for children.

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According to financial information provider FnGuide on the 1st, the average one-year return of 20 children’s funds stood at 127.5% as of the previous day. While this may appear to be strong investment performance, it is largely a common feature of the recent bull market rather than evidence of standout performance by children’s funds. By comparison, domestic equity funds rose by an average of 175.7% over the same period.

Some products, however, posted one-year returns of only around 10%. Representative examples include Mirae Asset’s ‘Our Child Chindia Sector Leaders’ fund, with a return of 5.9%, and Shinhan Asset Management’s ‘Shinhan Mom’s Love Children Emerging Star’ fund, with a return of 12.1%. In the case of the ‘Shinhan Mom’s Love Children Emerging Star’ fund, some share classes even recorded negative five-year returns.

Children’s funds refer to financial products opened in a child’s name and invested over the long term to build future lump-sum savings, such as money for education or marriage. They are not policy-backed financial products, but private-sector funds marketed under the theme of “children.”

The significant underperformance of children’s funds compared with market indices is seen as the result of a lack of clear direction in their investment portfolios. Although Samsung Electronics and SK Hynix were among their largest holdings, their combined weighting remained in the low 20% range, making it difficult for the funds to fully benefit from the semiconductor boom. Nor did they have a notably high weighting in growth stocks suited for long-term investment. In effect, they failed to establish either a clear product identity as children’s funds or meaningful investment performance.

Average Returns of Children’s Funds and Gains in Domestic and Overseas Market Indices / By Yoon Seung-jun

Long-term investment performance has also been weak. According to data from the Korea Financial Investment Association, among 10 children’s funds that have been in operation for more than 20 years, nine had available fund price data. As of the 29th, their average 20-year return stood at 156%, far below the KOSPI’s 371.3% gain over the same period. Not a single product outperformed the KOSPI.

If a parent had invested 20 million won in a children’s fund under their child’s name 20 years ago, the investment gain would have been about 31.2 million won. Had the same amount been invested in a KOSPI index fund, the gain would have reached about 72.26 million won. In other words, parents who invested in children’s funds earned more than 40 million won less than those who invested in KOSPI index funds. The gap is even wider compared with investors in an S&P 500 index fund, which rose 444.5% over the past 20 years.

A number of products posted 20-year returns of less than 100%. Representative examples include Daishin Asset Management’s ‘Daishin Leading Companies Children’s Fund’ at 70.0%, Shinhan Asset Management’s ‘Shinhan Mom’s Love Children Installment Fund’ at 61.3%, and Hana Asset Management’s ‘Hana i-Love Installment Fund’ at 57.1%.

20-Year Returns of Children’s Funds / By Yoon Seung-jun

Relatively high fees also undermine the appeal of children’s funds as long-term investment products. The average total expense ratio of 20 children’s funds stood at 1.48%, more than 1.3 percentage points higher than the 0.1% average for KOSPI-tracking ETFs, excluding leveraged, inverse and active ETFs. This could widen the return gap with index funds if the investment is held for more than 10 years.

There are no special tax benefits either. Children’s funds allow parents to gift up to 20 million won in total, based on principal, to their minor children tax-free — 10 million won every 10 years. But this benefit is not exclusive to children’s funds. Whether parents choose ETFs, public funds or other financial products, they can transfer up to 20 million won to their children without paying gift tax.

As a result, the size of children’s funds has continued to shrink. The total assets under management of children’s funds, which stood at 433.6 billion won three years ago, had fallen to 337.3 billion won as of the 30th, a decline of nearly 100 billion won. This contrasts with the same period, during which domestic equity funds saw their assets increase by about 38 trillion won and overseas equity funds by about 33 trillion won.

Against this backdrop, some say asset managers need to differentiate their portfolios and strengthen growth stock-focused strategies.

“Even if children’s funds are designed as long-term investment products, what investors care about most is returns. If their performance continues to lag market indices, a decline in assets under management is inevitable,” said a researcher at a brokerage research center. “To become competitive, children’s funds need to move beyond large-cap portfolios that resemble ordinary public funds and actively identify and include stocks with long-term growth potential.”