Child Plan: Is that REALLY worth for your kids?

10 December 2011, 7:58 am

Child Plan: Is that REALLY worth for your kids?

IamremindedofaTamilsaying, “Experiencewhatitistobuildahouse,andgetachildmarried”,probablythatisthereasonwhywiseparentsinvesttomeetthelongtermfinancialobligationslikeeducationandmarriagecostoftheirchildren.Inadditiontherisinginflationratealsocallsforstartingsavingsearlyinachild’slife.Howeveritwouldbeadvisabletoknow,evaluateandcomparevariousmeansofsavings.Thiscouldalsoenlightenyouabouthow “childplans” neednotbetheonlymethod.

Disadvantages of a Readymade “Child Plan”

“Childplans” withinsuranceresembleunitlinkedinsuranceplans,startingearlyinachild’slifeandendingonlywhenthechildattainsmaturity.Theamountofmoneyinvestedintheseplansisinsignificantconsideringanin-builtinsurancecomponent,andotherchargeslikepremiumallocationchargesthatarethecommissionpaidtodistributors.Thiscouldleadtolowreturnintheinitialstagesandadditionallossesonleavingbeforecompletionofthetenure.

Most of the “Child plans” in the industry comes with a catchy name to capitalize the “Child sentiment” in us.

We need a different medicine for a kid and adult. But do we necessarily need a different type of investment options for securing a kid’s future. Think.

Alternatives for Child Plan:

ItistobenotedthatotherinvestmentproductslikePublicProvidentFund,NationalSavingsCertificate,NationalSavingsScheme,RBIbonds,postofficedepositsandinstrumentsandmutualfundsthatservethepurposeofsavingsandincreasingofcapitalvalueapplyequallywelltoinvestmentforachild’sfuture.

Mutualfundsareavailableinawiderangetosatisfyallappetitesforrisks.Inadditiontherearemutualfundsthataredesignedformeetinglongtermfinancialobligationsofchildren.Onecouldalsoinvestinfundswitharightbalancebetweendebtandequitythatpromisebettercapitalgrowththanchildplans.Itisalsopossibletogoinforsystematicinvestmentplanthatofferstheopportunitiesoftakingadvantagesofpricedifferencesandgaininginthelongrun.

It is true that systematic investment plans or SIP help save entry cost and build a habit of regular savings for capital growth to meet children’s financial obligations. It is also possible to avail of tax benefits as such funds are taxed only on maturity and a major child’s income would be taxed separately. I am sure you would agree that this would help saving unnecessary expenses and cuts in investing in child plans.

PPForPublicProvidentFundisalsogoodasmutualfunds,withopeningaPPFaccountfora20-yearperiodinachild’snamehelpingtomeetlongtimefinancialobligationsofchildren.IthasbeenstipulatedthatanannualinvestmentofjustRs.70000wouldleaveyouwithalmostRs.32lacasaresultofthecompoundingeffect.Itisdifficultfora “childplan” withinsurancecomponentandupfrontchargestoofferyousuchagreatreturnwithouttakingmuchofrisk.

An Ideal Mix:

Insteadofgoingfora “ReadymadeChildPlan”,onecancustomizetheirInvestmentPlanfortheirchildwithacombinationofTerminsurance,PPFandequitydiversifiedfunds.
If tax saving is your motive one can consider ELSS funds instead of a regular equity fund.
It gives you similar tax benefit like a child plan. You get 80 C benefits for your investments. Also the returns are also tax free.
At the same time, the charges are very very minimum and negligible when compared to “readymade child plans”.
You can increase or decrease your contribution every year depending upon your financial situation.

Sowhenever,youthinkofchildplanthinkofacustomizedinvestmentplanforyourkid’sfuturewithamixof2or3investmentoptionsinsteadofreadymadeproductwithatag “ChildPlan”.Iamsureyouwouldagreethatreadymadechildplansprovetobenotidealinstrumentstosave.Thewisestlineofthoughtwouldbeamixofdiversifiedinvestmentsthatgivesgoodreturnwithlowcharges.

TheauthorisRamalingamK,anMBA(Finance)andCertifiedFinancialPlanner.HeistheFounderandDirectorofHolisticInvestmentPlanners(www.holisticinvestment.in)afirmthatoffersFinancialPlanningandWealthManagement.Hecanbereachedatramalingam@holisticinvestment.in.