Investment for kids need not be via child plans

The latest trend in the mutual fund industry is the introduction of goal-based investment schemes. A first attempt towards this end is the introduction of child plans by some funds.  Actually, as most investors would know, child plans are not a new innovation. Insurance companies have offered these for ages. Even mutual funds had made an attempt a while back but it never caught on.

However, now, with goal-based investing becoming the buzz, schemes specifically targeted towards building up capital for the education and other future needs of children have reappeared.
Raising children is not easy, every parent will tell you; providing them with a secure future is an even more overwhelming task. There are medical expenses to take care 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 labelled as “child plans” would be a mistake.  Investment products do not come with an “adults only” certificate. So for your child, you can use precisely the same investments that you use for yourself. Think Public provident Fund (PPF), National Savings Certificate (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 insurance plans, or Ulips. The change of label, so to speak is a psychological ploy. The product is more or less the same — 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 agent commissions, which are pretty high, mortality premium and other administrative costs, only the remaining money is 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 of buying insurance. It benefits neither 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. This brings us to the question — what is a good investment for a child?

One of the answers is PPF. Yes PPF, an instrument which is generally considered “adults only”. Consider this — say 20 years from now, you would require around ¤22-25 lakh on your child’s higher education. Around ¤5 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 ¤70,000 in this account every year. If you do this, 20 years from now, you will have an astounding amount of around ¤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.
In fact, it is a prudential 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 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 ¤3,000 a month, can grow to more than ¤15 lakh at a conservative 12% per annum.
To put this in an equation:
PPF + diversified equity mutual fund = your child’s future.
To sum
The moot point is that investing for a child is no different from investing for yourself. The principles remain the same. Remember, investments do not carry an ‘adults only’ certificate, but one of ‘parental
guidance’.
At the same time, do keep in mind Warren Buffett’s dictum that you should leave enough for your kids  so that they can do something, but not so much that they have to do nothing.

The writer is director, Wonderland Consultants,
a tax and financial planning firm. He can be contacted
at sandeep.shanbhag@ gmail.com