Saving for your child's future

Child-centric investment products suit those who cannot maintain financial discipline

Nowadays, there are multiple advertisements that tell you to invest, save and buy policies for your children. With Children’s Day on Tuesday, expect more such advertisements. For good reason child-centric investment products have emotional appeal. Individuals tend to hold their savings longer if the investments are specifically for children, which helps them get better returns. Fund managers, on the other hand, can take long-term investment calls. “If you call a scheme a child fund, there is a greater propensity to hold that fund for a longer period because parents are reluctant to touch money that is meant for one of their children. Parents withdraw money from other funds,” says Prashant Joshi, head of products, Tata Asset Management.

Keep the lock-in, exit load in mind: Fund houses have child plans mainly in two categories — monthly income plans (MIPs) and balanced funds. MIPs come with 15-25 per cent equity and the rest in debt. Child plans in the balanced fund category are equity-oriented and these invest 65 per cent in stocks either directly or through futures and options.

Balanced funds work out to be good for the long term (over seven years), as they automatically rebalance a portfolio depending on the market situation. They also capture the upside in equity, while protecting the downside. MIPs can help in savings if the goal is short-term. MIPs invest in debt predominantly, with 15-25 per cent to equity.

Some of these plans also come with restriction on redemption. You could opt for a plan that restricts redemption until the child turns 18 or the investment completes three years. After the child becomes a major, the investment needs to be transferred to his name and can only be withdrawn thereafter. Some keep a high exit load of one to three per cent to discourage exit. 

Tip: Lock-in can take away the flexibility of changing investments if a fund is not performing. Also, in long-term equity products, as an investor moves closer to the goal, he should slowly move the money into a debt fund, which would not be possible in the lock-in option if your goal is for less than seven years.

Flexible but can be expensive: Investment products in insurance have higher charges compared to mutual funds that eat into the returns. But, when it comes to a child plan, insurance products offer much more flexibility. “Child plans in insurance address the key need of securing your child’s future goals. The unique benefit offered by child plans is that payouts are structured based on when the child needs the money, even if the parent is not around.” says Khalid Ahmad, head – product management, PNB Metlife Insurance.

In other financial products, all money comes to the wife, legal heirs or nominee when an individual passes away. There are chances the receiver is unable to manage the funds to suit future needs of the family. Child plans in the insurance space give the insured an option to say when the money should be paid out and select the number of instalments. The family gets lump sum payment on death of the policyholder and all future premiums are waived. The insurance company continues investing this money on behalf of the policyholder. In the future, the child gets the money at specified intervals as planned under the policy. 

Child plans come in two options — they can be unit-linked insurance plans (Ulips) or traditional policies. The insured can choose the money that has to be allocated to equities and debt in Ulips and get market-linked returns. Traditional plans offer guaranteed returns at the end of the policy term. 

Tip: If you opt for a child plan for the flexibility, avoid traditional plans. They lack transparency, and the returns are low. “Also, there are Ulip products that are low cost. They have either zero or negligible policy administration and premium allocation charges, making them competitive with any other financial products for children,” says Santosh Agarwal, head of life insurance, Policybazaar.com. 

Low yielding but safe: Parents could also opt for traditional investments such as a bank fixed deposit (FD) or Public Provident Fund (PPF). An FD in a child’s name is not much different than the regular one. The guardian will be in charge of the account until the child turns 18. Some banks such as Allahabad Bank offer a Sishu Mangal Deposit Scheme, which is like a recurring deposit and has a tenure of six years. It stops once the child is 21. 

A parent can also open a PPF account in the name of a child. But, the total limit he can invest in a PPF account would be Rs 1.5 lakh. If a parent operates PPF for his child, he will need to split the Rs 1.5 lakh between his and the child’s accounts. If your child is still under 18 by the time the PPF investment matures (15 years), the proceeds would be handed over to you if you don’t extend it further and will be tax-free. Then, there’s Sukanya Samriddhi Account for a girl child, which a parent can open anytime after the birth of a girl until she turns 10. He also gets tax deduction under Section 80C. The account will remain operative for 21 years from the date of its opening or till the marriage of the girl after she turns 18. For educational purposes, partial withdrawal of 50 per cent of the balance is allowed after she turns 18.

Tip: Invest in these as part of your overall debt allocation.