|Kids: Anish (2.5)|
|Plan details: |
• Bought a Young Scholar plan from Aviva India.
• Pays an annual premium of Rs 30,000.
• Bought the policy in 2009 to mature in time for his son's higher studies.
|"I want to provide a secure future for my son and ensure that there is a substantial base for him when he enters college 15 years from now."|
Starting a family must rank among the scariest things one does because one has to learn to be wholly responsible for the life and well-being of a child. Obviously, it calls for much emotional adjustment, but equally important is the financial impact. You spend constantly, starting from the time before the baby is born till he goes to college. If you do not plan well, you are bound to run into financial roadblocks at critical junctures of his life. As a parent, you're willing to deprive yourself of luxuries in order to ensure your child's long-term financial security. In many cases, a happy by-product of this exercise is that the child grows up to be aware of the virtues of fiscal prudence.
Money Today has earlier discussed the cost of bringing up a baby. We now look at the ideal modes of investment so that you can afford to maintain a comfortable lifestyle and still be able to pay for all the necessities and luxuries for your child. "Every couple must set specific milestones and resolve to reach them through savings. It's easy to assess your performance midway and make adjustments, such as revising the milestone, increasing your savings, or pushing your horizon further," says Rohit Sarin, founder partner, Client Associates, a private wealth management firm.
The Consumer Attitudes to Savings Survey conducted by Aviva Life Insurance shows that 32% of Indians are motivated to save for the education of their children as against the global average of 17%. Fund houses and insurance companies play heavily on this streak of parental responsibility. They insist that it is only through their targeted schemes that you can afford to take care of your child's future. Most of us buy this line of thought. When the economy was buoyant and the markets were booming, it didn't really matter. But in these dark days, every percentage point of return matters. So you must consider whether these plans will create wealth for your child or a regular investment strategy will work better.
Savings and investments simply won't do, scream the ads. What you need is a child insurance plan, they say. Are they right? Just because an insurance plan is called a 'child benefit plan' or 'child care plan' it does not make it perfect for achieving your financial goals. "If you have accounted for your child's financial needs while planning your insurance, you don't need a targeted plan," says Rajesh Dalmia, Kolkata-based financial planner.
A common misconception is that child plans insure the life of the child. Which, if you pause to consider, doesn't make sense. A child plan insures your life, but makes sure that the benefits go to the child. If your insurance is insufficient, you could consider such a plan. "A child plan gets you a headstart to create a financial corpus for your child," says Vishal Gupta, director, marketing, Aviva India.
These policies come with a life cover and are structured in such a way that besides providing a lump sum to your child in the event of your death, they remain in force till the policy matures. The maturity benefit is paid to your child after he attains the age of 18 as a lump sum or in pre-determined instalments. "I have taken a policy that I feel will grow over the next 15 years to create a sizeable corpus for my sons," says Mumbai-based Sudip Bhattacharya.
Planners suggest that you add a waiver of premium rider. This allows the plan to continue till maturity, with the insurer paying the premiums in case the parent dies during the term of the policy.
While child-specific insurance plans might have some merit, childoriented mutual funds can generally be ignored as they aren't too different from the other MF schemes. Also, these funds have not fared well. One of the oldest funds, UTI Child Career Balanced Plan, has earned 10.2% over the past 10 years. Compare this with the Reliance Vision, a diversified equity fund, which has earned 25.8% in the same period.
"A portfolio of diversified equity funds will work better; for longterm plans, even an index fund should do the trick," says Sarin. Take the UTI Index Select Equity Fund, which has earned 13.8% return over the past 10 years. Parents also find the systematic investment plan option convenient. "While actively managed funds outperform the markets over longer periods, they also carry the fund manager's risk," says Gaurav Mashruwala, a Mumbai-based financial planner.
|Kids: Sumit (12), Mohit (8)|
|Plan details: |
• Has bought Bright Stars from Bharti AXA Life.
• Policy bought in December 2008.
• He pays an annual premium of Rs 1 lakh on the policy, which will mature in 15 years.
• Policy will remain in force even in the event of his death. The maturity benefit will be paid to his son when he turns 18.
|"The plan provides for the payment of premiums in case of my premature death, without affecting the corpus. This will take care of my sons' education."|
Targeted funds have not fared well for several reasons. For one, these funds have a small asset base. Also, most of them are heavily tilted towards debt instruments, and hence, fail to gain from the power of equity compounding. Most importantly, these funds do not come with lock-ins. So, despite a long-term goal, investors can exit whenever they want. While some investors are disciplined, many others might decide to exit early, in which case the fund will not be able to gain from its longterm investments.
Focus on equities
"Your objective is to create wealth for your kids and your portfolio will have to be skewed towards equity," says Dalmia. He recommends a portfolio of diversified equity funds and blue-chip, large-cap stocks. It seems an obvious choice and is, in fact, advised by experts even for those not planning for their children. But, as Mashruwala says, "Parents make the mistake of choosing debt because they think it is safe. On the contrary, long-term returns from debt are abysmal and eroded by inflation. If the goal is seven to nine years away, equities are a must."
Of course, equity investing comes with its share of problems. "We belong to the middle-income group and have started getting surplus funds recently. But with both of us working, where is the time to track investments?" asks Gurgaonbased Prasenjit Das. For most working couples, investment in stock market is a riskier proposition than investing in mutual funds. Moreover, for a typical working family, almost 45% of the household savings go into buying a house, which leaves very little to invest or save more.
Play safe with debt
Though your primary exposure should be to equities, mix it with debt. "I recommend investment in the Public Provident Fund (PPF), which gives 8% tax-free return and is a long-term product," says Dalmia. The PPF is a governmentsponsored scheme with a 15-year lock-in. So if you save Rs 70,000 a year in PPF, you'll get Rs 19 lakh in 15 years—at virtually no risk.
There is another school of thought that suggests moving equity investment to debt as the milestone year nears. "Ideally, you should start moving your money out of equity one or two years prior to needing the money, lest your corpus be knocked off by unexpected events," says Mashruwala.
Remember what happened after January 2008, when equity returns took huge hits, eroding all the wealth that many had created, making the best-laid plans go awry. In fact, for those who start planning early and who are totally riskaverse, staying away from equity might prove healthy.
Whether you invest in child-specific schemes or customise a portfolio to fund your child's future, there's no point in investing your money and forgetting about it. To get the most out of your investments, you need to track and review their performance regularly.
"If it's not doing well, assess the reasons and rejig it for growth," says B. Srinivasan, a Bengalurubased financial planner. Your plans can go awry if you are not adequately protected against future shocks. "Instead of an expenditure budget, keep a savings budget and stick to it," advises Sarin. Dalmia also suggests that you make all investments in your child's name.
Mashruwala adds, "I have observed parents who hesitate to withdraw from this corpus because they find it awkward to dip into the (child's) resources and are tempted to let it grow further. Eventually, they dip into their own reserves."
Make sure you don't ignore inflation and the future value of your savings. Otherwise, the investment that you had hoped would fund your child's college fees may not be enough even for his first-year tuition. But with adequate planning and foresight, you can ensure that his financial future is as secure as you want it to be.
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