Instruments, which work for your long-term goals, can be used to meet the child’s needs as well.
Providing a secure future for your children is quite a task. Consider ever-rising inflation, and your child’s medical expenses, tuition fees, marriage costs will only get costlier. However, investment planning for children makes normally astute investors get overcome by sentimentality. Issuers of financial products targeted towards children know this – a fancy name for the product and heavy-duty promotion, with a celebrity or two thrown in, is enough to seduce the most exacting of parents. And a bigger mistake, is focusing exclusively on products labelled ‘Child Plans’. Investment products do not come with an Adults-Only certificate. You can use the same investments for your child that you use for yourself. Think Public Provident Fund (PPF), National Savings Certificate, RBI bonds, mutual funds, Post Office instruments and, of course, pure equity.
Most child insurance products are nothing but modified endowment or money-back policies, if not unit-linked insurance plans (Ulips). The change of label is a psychological ploy and the product is about the same. These plans suffer from the same limitations that traditional endowment plans and Ulips suffer from in terms of low returns and high costs. After deducting the exorbitant agent commissions (also known as premium allocation charges), mortality premium and other administrative costs, only the remaining money is invested. Also, the bonuses declared are not on a compounded rate basis unlike, say, the returns on PPF or Cumulative RBI Savings Bonds.
Nowadays, most such child plans offer insurance in the name of the parent. Compromising on the child’s future is an expensive way to buy insurance. It neither benefits the child or the parents. If you need insurance, buy term insurance. All the money you would save on account of the low premium can be invested to meet the child’s long term goals. Even with mutual funds, child plans are usually euphemisms for schemes with differing asset allocations. Not to mention long lock-in periods.
GOOD INVESTMENTS
While trying to save for a child, time is your greatest ally, so the sooner you start, the better equipped you are. So, what is a good investment for a child? Where do parents invest to get better returns and secure the child’s financial future? One answer is PPF, an instrument considered ‘Adults Only’. Assume, 20 years from now, you would require Rs 22-25 lakh on your child’s higher education. Around Rs 10 lakh needs to be earmarked for marriage. A simple, yet effective, investment strategy to provide for this would be to open a PPF account in your child’s name in the very first year itself. Invest Rs 70,000 in this account every year. If you do this, 20 years from now, you will have an astounding Rs 32 lakh at your disposal — which you can use for the education and marriage of your child and still have some left over. No insurance policy can assure you such a return. Such is the power of compounding and selecting the right plan.
Your child is still a child and he or she doesn’t have the capacity to make proper financial decisions. So, it is you who must make these on his or her behalf, by making optimal use of the instruments at your disposal. Note that the total investment in PPF for the parent and the child in any year cannot exceed Rs 70,000. In other words, if both parents are already investing the maximum amount in PPF in their names, they cannot invest additionally for the child. However, if any one or both parents are not reaching their respective Rs 70,000 limit on account of existence of Company PF, ELSS and so on, then further investment in PPF is possible.
EARMARKING CAPITAL
In fact, it is also a good practice to invest the funds in your own name, earmarking the capital for the child, as and when he or she may need it in future. This way, you prevent any misuse of the money by misguided children. The only thing you need is discipline in keeping the earmarked funds invested over the time your child attains majority, so that the power of compounding makes the invested money grow healthily.
More From This Section
As mentioned before, planning of investments for the child does not mean using anything newer than what you’ve been using so far for your investments. Do you invest in mutual funds (MFs)? Then why not choose a diversified equity fund, with a good record, and allocate a small portion of the money to this fund to be invested systematically over the years?
Historically, it has been proven that equity investments have outperformed any other asset class. However, it comes with associated risks. The key is that the possibility of a long holding period as in the case of a child allows his or her parent to undertake that risk! Grab this opportunity with both hands. A small sum kept aside, say Rs 3,000 a month, can grow to more than Rs 15 lakh at a conservative 12 per cent yearly.
To cut a long story short, PPF + Diversified Equity Mutual Fund = Your child’s future. The bottom line is that investing for a child is no different than investing for yourself. The principles remain the same. And, keep in mind Warren Buffett’s dictum, that you should leave your kids enough so that they can do something, but not so much that they have to do nothing.
The writer is Director, Wonderland Consultants