Every parent knows raising children is not easy, providing them with a secure future, even more overwhelming. There are medical expenses to think of, not to mention the ever rising tuition fees. Marriage may be distant on the horizon, but the way inflation is rising, years later, things are only going to get worse. When trying to save, time is your greatest ally, so the sooner you start, the more equipped you will be.
However, focusing exclusively on products that are actually labeled as “Child Plans” is a mistake. Investment products do not come with an “Adults Only” certificate. Which means that you can use precisely the same investments for your child that you use for yourself. Think PPF, NSC, RBI bonds, mutual funds, post office instruments and of course, pure equity.
Most children insurance products are nothing but modified endowment or money back policies, if not ULIPs. The change of label, so to speak is a psychological ploy, the product is more or less the same. Putting it differently, naam badalne se kaam nahi badalta. These policies suffer from the same limitations that traditional endowment policies 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.
Nowadays, most such child plans offer insurance in the name of the parent — which is fine, but compromising on the child’s future is a pretty expensive way to buy insurance. It neither benefits the child nor the parents. If you need insurance, buy term insurance. All the money that you would save on account of the low premium can be invested for the long-term for your child.
Even with mutual funds — child plans are more often than not euphemisms for schemes with differing asset allocations. Which brings us to the question — then what is a good investment for a child? Where do parents invest to get better returns and secure the child’s financial future?
One of the answers is PPF. Yes PPF, an instrument which is generally considered to be “Adults Only”. Consider this — let’s say you have two children — again, say 20 years from now, you would require around Rs 22-25 lakh each for their higher education. Even conservatively, around Rs 10 lakh each may be needed to be earmarked for their marriage. A simple yet effective investment strategy to provide for this would be to open a PPF account in each child’s name in the very first year itself. Invest Rs 1,00,000 in each account every year (total investment limit for PPF is Rs 2 lakh per year). If you do this, 20 years from now, you will have an astounding amount of around Rs 86 lakh at your disposal — which you can use for the education and marriage of your child and still have some left over. No so called ‘child plan’ can assure you such a return. Such is the power of compounding and selecting the right investment.
Of course, the aforesaid calculation assumes a PPF interest rate of 7.5 per cent p.a. Actually, this rate is not constant but variable and market driven now. And since PPF has anyway become market driven, it may be a better idea to invest in ELSS (tax saving) funds rather than PPF. Those with a conservative bent of mind may invest in a combination of PPF and ELSS. Anyhow, the assumption gives us a broad idea about how much the capital has the potential to grow to. Also, readers would have noticed that we have mentioned that the capital grows to a substantial sum over twenty years. But isn’t PPF a fifteen year scheme? Yes, it is, however, after the initial period of fifteen years is over, one can keep on extending the deposit for a period of five years at a time!
This way, you can convert your PPF investment into a 5 year deposit that offers tax-free interest, tax saving under Sec. 80C and immense liquidity — and all this for your lifetime.
Anyway, coming back to the topic on hand, 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.
Also note that the total investment in PPF for the parent and the child in any year cannot exceed Rs. 2 lakh. 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. 2 lakh (on account of existence of Company PF, ELSS etc.), then further investment in PPF is possible.
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 immature (grown up) children.
The only thing you need is discipline in keeping the earmarked funds invested over the time that your child attains majority, so that the power of compounding makes the money grow healthily.
Like mentioned before, planning investments for the child does not mean using anything new than what you have been using so far for your investments. Do you invest in mutual funds?
Then why not choose a diversified equity fund with a good track 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 child’s situation in life allows him/her to undertake that risk!! Grab this opportunity with both hands. A small sum kept aside, say Rs 5,000 a month can grow to more than Rs 25 lakh over 15 years at a conservative 12 per cent p.a.
Long story short — PPF / ELSS + Diversified Equity Mutual Fund = Your child’s future.
Investment planning for children makes normally astute investors who would otherwise be cold and objective regarding their own investments somehow get overcome by sentimentality and emotions. Issuers of financial products targeted towards children only know this too well – a fancy name for the product, heavy duty promotion with a celebrity or two thrown in is enough to seduce even the most exacting of parents.
Investing for a child is no different than investing for yourself. The principles remain the same. Remember, investments do not carry an Adults Only certificate, just a PG (Parental Guidance) one.
At the same time, do also keep in mind Warren Buffet’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 authors may be contacted at firstname.lastname@example.org