Don't be frightened into investing for your kids

Parents have enough to worry about —- rising costs of education, everyday needs and transportation, to name only some of the issues. Over and above this, they have to worry about the future of their child.

There is a whole industry thriving on this—the financial services industry. For them, it’s as if children were milch cows.

Financial advisors tell parents to invest for their child’s future in various financial products. Parents are constantly fed information on their child’s needs down the line —college, marriage, first car, first trip abroad, health, etc. The financial products for children are supposed to take care of all these future needs.

These include child plans from insurance companies as well as mutual funds.

But the worst investment mistake parents can make is investing in these child-specific products. They are expensive, they are illiquid, they do not offer superior returns and they do not take care of the children’s needs in the future.

Take insurance. An insurance-based product for a child is a complete waste of money. Parents block their capital, which could be invested elsewhere to earn better returns. Parents reduce their own cover, which is much more beneficial to the child. As for the returns, rest assured they will be way below inflation given the costs and the predominance of investment in fixed income. At the end of the period, the money received will not even cover a small part of the child’s needs as inflation would have far outstripped returns.

Parents are much better off investing in products that fetch them returns than fetch their children returns. Look at the asset allocation pattern of children plans, the costs, the future potential and the liquidity and then work towards cheaper and more liquid alternatives —there are plenty of those. The only ones benefitting from children plans are the product manufacturers and the product sellers.

Another big fright for parents is their own future. Financial planners take Excel spreadsheets and annuity tables and tell them that to be able to eat a meal in a restaurant at the time of retirement they must save annually two times their income!
A bit of an exaggeration, but it drives home the point. Parents are frightened into making investments that are supposed to take care of them in their retirement. One standard asset allocation mix is given and adhering to that asset allocation is supposed to take care of retirement needs, which look mind boggling at present.

Unfortunately, annuity tables and Excel spreadsheets work only on paper. Real life is different, especially when day-to-day living is taking up most of the time and money. Most of the time, there is just not enough money to invest in long-term asset allocation plans as present day inflation takes care of present day income.

The advice here is, do not get frightened into investing in long-term asset allocation plans as it benefits the advisor and product producers more. Always look at costs and liquidity and remember that when economy does well, parents also do well and that takes care of all future needs.

arjun@arjunparthasarathy.com