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No Child's play

Picking the best investment options to secure your child's future is not easy. Here's how you can go about it

No Child's play No Child's play

Seeing your children grow up healthy and happy is one of the best experiences of life. But too many of us have seen them struggle, weighed down by money problems or personal trauma such as a parent's death. A recent study by Aviva Life says that Indians are better dreamers but poor planners; out of 100, only 24 people plan in India and 81 per cent of Indian parents do not even know what will be the cost of higher education in future. In case you are not sitting on a vast cash pile that fund your little ones, it is time to chalk out a comprehensive financial plan and invest systematically to secure your child's future. You will find several investment options, but do not buy these products at random. Study and evaluate them carefully to understand which one will be the best option to give your child a better future.

Even before you start assessing the products, it is imperative to set your goals. Parents must have a clear idea about their child's future needs and how much they should save for a smooth passage. Be it education or a grand wedding or any other priority, first lay down your goals in money terms keeping in mind specific timeframes (a graduation fund when your child is 18, a marriage fund at a later date and so on). And do not ignore inflation while you are at it. For instance, if a master's degree in business administration from a reputed college currently costs Rs 20 lakh, add an annual inflation cost of around 10 per cent to the fund that you will need 15 years later, assuming your child is five years old. It means you will require a total of Rs 84 lakh.

"Most parents cannot say for certain what their children will want to do when they grow up. For starters, look at all the higher education options of your choice and their maximum costs, so that you get a basic idea of the finances involved," says Karthik Raman, Chief Marketing Officer, and Head - Strategy and Products - at IDBI Federal Life Insurance. Tarun Birani, the founder of TBNG Capital Advisors, agrees. "The key challenge in planning for children is that most parents start late, due to which the corpus does not grow well," he says.

Now that you know how to go about it, let us take a look at the child plans and the benefits they offer.

Child Insurance Plans

Most of the insurers offer child plans, and two broad categories are available in the market - the unit-linked insurance plans or ULIPs and the endowment plans. ULIPs are market-linked plans, allowing you to invest in equities and debt. Under endowment plans, the sum assured is paid along with accrued bonus at the end of the policy term. These plans allow you to invest in debt instruments. In both cases, the investment and the maturity value are eligible for tax benefits.

"The first thing you should get for your children as soon as they are born or a couple of years old is a sinking fund," says Manik Nangia, Director (Marketing) and Chief Digital Officer, Max Life.

How you benefit: Child plans are different from regular ULIPs and offer a couple of additional benefits. For instance, if the policyholder dies mid-term, the company pays a sum assured as a death benefit, either in instalments or as a lump-sum payment. Second, there will be a premium waiver, and the surviving parent/family need not pay any more. The insurance company will pay the rest of the premiums, and the policy will continue uninterrupted till the end of the policy term.

Who can buy: Child insurance plans are designed for parents, but grandparents can also buy them. Experts, however, advise against it due to age factor. Ideally, the grandparents can propose a policy in the name of the child's parents (who will be covered), and the child can be the beneficiary.

Should you buy it: Before you buy any child insurance plan, check out the target time, future costs (taking inflation into account) and benefits on offer. If you want to save the desired amount with moderate but guaranteed returns over the given period, a traditional child plan might be the right option. But given the low rate of returns - around 4-5 per cent - it is recommended not to invest in endowment plans. In case you have high risk appetite, buying a ULIP could be a good option. What's more, stay invested for the entire policy term because ULIP costs are front-loaded and you can only reap the benefits if you stay invested for the long term.

It is also important to look at charges. Costs should be kept low over the long term, or they will eat into total returns. A few insurance companies have done away with premium allocation and fund administration fees, and only charge you for mortality and fund management, making unit-linked policies more cost efficient. "Some insurance companies have started pricing products to match with mutual funds. In fact, all insurers will have to do that to remain competitive," says Tanwir Alam, CEO of Fincart, an online financial advisory.

As per the rules of the Insurance Regulatory and Development Authority of India (IRDAI), net charges (the difference between gross yield and net yield) cannot exceed 3 per cent for unit-linked policies spanning less than 10 years and 2.25 per cent for policies with a tenure of more than 10 years. Therefore, invest in ULIPs only if you can stay invested for the entire period.

Child-specific Mutual Funds

Several mutual funds offer children-specific schemes, which are mostly hybrid in nature, a mix of equity and debt. Asset allocation varies from scheme to scheme as some are more conservative and invest more in debt while others are aggressively into equity. Selecting the right product will depend on your child's age though, as you will require a major chunk of the money when he/she starts college at 18.

Most of these schemes do not have a mandatory lock-in period, but you can opt for a three-year lock-in or even for the entire period till your child turns 18. But considering it is voluntary, investors should not lock in their money. To ensure investment continuity, a stiff exit load of around 3-4 per cent is in place compared to regular mutual funds where the exit load is 1-2 per cent for the first year. Some of these schemes offer personal accident insurance cover to the parent/guardian of the unit holder.

Who can invest: Parents, grandparents and guardians can invest in the name of the minor child. The money goes into the bank account of the child on redemption or whenever the lock-in is over (if opted).

Should you buy it: Is it essential to invest in a child-specific mutual fund scheme? Not really, say experts. According to Vidya Bala, Head, Mutual Fund Research, at FundsIndia, these plans are no different from regular hybrid funds. "Also, many parents may not feel comfortable as the money goes to the child's bank account," she adds.

"You can invest in regular mutual funds with high equity exposure as you have the advantage to invest for the long term. On the other hand, most child plans come with frozen allocations, which may not always be appropriate. Investing for a child in an equity fund is good enough. As you get closer to your goal, moving your investments to a fixed-income fund will be the best option," says Dhirendra Kumar, Chief Executive of Value Research.

"We do not recommend child-specific funds. Instead, invest in aggressive funds depending on how old the child is. If it is a newborn or a two-year-old, 90 per cent of your investment should be in equity," he points out.

Sukanya Samriddhi Scheme

This plan is designed to benefit girl children. It currently offers an interest rate of 8.4 per cent per annum, which is subject to change on a quarterly basis. Parents can only invest in this scheme for up to two daughters aged below 10. The maximum amount that can be deposited in a financial year is Rs 1,50,000 and the minimum is Rs 1,000. Deposits in this account have to be made for 14 years and it will mature after 21 years from the date of opening. The account holder can withdraw 50 per cent of the money for higher education or marriage when she is 18. The interest earned under this scheme is tax-free, and the investment will also earn tax rebate under section 80C.

Best Way Forward

According to experts, a combination of term insurance and mutual funds will give you the best results when it comes to planning for your child's education and other requirements. Investing in an equity fund will give you high returns in the long term, helping you build the corpus over the years. And a term plan is an inexpensive way to secure the family's future in case something untoward happens to the breadwinner.

"I would advise not to put the entire corpus in one basket. A balanced portfolio, in line with the customer's risk-taking capacity, will ensure a better yet stable yield," observes Mudit Kumar, Chief and Appointed Actuary, Bharti AXA Life Insurance.

Published on: Jun 10, 2017, 4:57 PM IST
Posted by: Priyadarshini Maji, Jun 10, 2017, 4:57 PM IST