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Regular readers of this column should excuse me this time, for I am going to discuss investment planning for children and cannot but repeat myself.

In my experience, some concepts warrant a constant reiteration, the more so as we near March 31 — that time of the year when the high-decibel promotional campaigns of insurance companies and mutual funds hit their loudest levels.

The lure of saving tax, combined with the emotional appeal of providing for your bundle(s) of joy, makes the job of these companies relatively easier.

Raising children, as every parent knows isn’t easy; providing them with a secure financial future, even more overwhelming. There are medical expenses to think of, not to mention the ever increasing tuition fees and marriage expenses.

The sooner you start saving, the better equipped you will be.

However, most parents tend to invest in products that are actually labelled as ‘children plans’. This in itself is a mistake.

Investment products do not come with an ‘adults only’ certificate, which means you can use precisely the same investments that you use for yourself, for your child. 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 unit-linked plans (Ulips). The change of label is only a psychological ploy.
These policies suffer from the same limitations as traditional insurance plans — what remains after deducting agent commissions, mortality premium and other administrative costs gets invested.

Also, the bonuses declared are not on a compounded rate basis, like say the returns of PPF or cumulative RBI savings bonds are.

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.
Also, what your child needs is capital growth — as fast as is safely possible.

Therefore, nowadays, Ulips have also started being marketed as children plans. Again, whether it is a standard Ulip or an Ulip child plan, it still remains an Ulip. Understand the expense structure well before committing your funds, for most Ulips have a very heavy front-end expense structure.

Even mutual funds that offer the so called children plans are nothing but liquid or balanced funds with a higher lock-in period. You achieve nothing by investing in such plans, except, of course, locking in your funds.

So what is good investment for a child?
One of the answers is PPF. Yes PPF, an instrument generally considered to be ‘adults only’. Consider this — say 20 years from now, you would require around Rs22-25 lakh on your child’s higher education and around Rs5 lakh 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 Rs70,000 in this account every year.

If you do this, 20 years from now, you will have an astounding amount of around Rs32 lakh at your disposal. No insurance policy can assure you such a return. Such is the power of compounding and selecting the right plan.

It would be prudent to invest the funds in your own name and earmark the capital for the child as per a time schedule he or she is most likely to need the funds in. This way, you prevent any misuse of the money by misguided immature children.

You need discipline to keep investing the earmarked funds over the time that your child attains majority, so that the power of compounding makes the money grow healthily.

Like I have said earlier, you can use much the same instruments that you use for yourself while planning investments for your child. If you invest in mutual funds, why not choose a good diversified equity fund (not a children plan!) 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, though the child’s situation in life allows him/her to take those risks.

Grab this opportunity with both hands. A small sum kept aside, say Rs3,000 a month, can grow in 15 years to more than Rs15 lakh at a conservative 12% p.a.

To cut a long story short, PPF + diversified equity mutual fund = your child’s future.
Do also 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.

sandeep.shanbhag@gmail.com