Don’t plan your child’s future with just returns in mind

When we think of investments, the first thing that comes to our mind is — “returns”. While returns are one of the most important considerations while choosing investment avenues, it is important to evaluate other features that come along, sometimes at the cost of higher returns.

Let us take the case of Manish Jain, who wishes to make investments to ensure a career-based education for his 5-year-old daughter Suhani, to be followed by her marriage.  Manish needs to start saving for the targeted amount ie. Rs22 lakh from now. 

So how should he go about planning his investments to achieve the targeted amount? We worked out two options:

Option I [Equity/ equity MFs]
Since the time horizon is long-term, it would be prudent to invest in equity / equity-oriented mutual funds, which have a tendency to give 12% returns.  Therefore, simple number crunching would draw up a figure of Rs4,500 to be invested per month to achieve the Rs22 lakh amount in 15 years by the time child turns 20.

Caution point:
Simply getting to the numbers does not mean that his “mission” is accomplished. While planning to fund your child’s professional education, it is also important to consider the following:

 Your child is 5 years today and will require this money at her age of 20 years.

 Even if you have the entire corpus available today, you cannot admit her into the educational institute today and pay all the fees in advance (as she is 5 years old now). By the time she turns 20, due to various reasons, this corpus may / may not be available.

 You are assuring that for the next 15 years you will set aside `4,500 every month, irrespective of everything that would prevent you from doing that.

 Last and the most important, you are assuming that you will “live” for the next 15 years and will save RS4,500 per month.
In case, due to an unfortunate event, which leads to the death of the parent, remember, the child will still grow to become 20 and would still require the Rs22 lakh as ascertained by you today.

So what should be the plan of action in such a scenario? 
 

Option II [Child insurance plans]
At the onset, let me warn you, that the plans offered by Insurance companies will score less in terms of “returns” when you compare them to investments in equity / equity mutual funds. However, they score high in terms of the concerns as raised above. How does a child plan take care of the concerns?

The insurance cover is on the life of the parent and the child is the beneficiary to the proceeds from the plan. Premiums are to be paid regularly, in this case, for the next 15 years.

Just like any other investment, this plan will give out the maturity proceeds or fund value in case of unit-linked plans.

What happens in case of death of the parent during the next 15 years?

It is from here the cover takes over as a comprehensive investment tool for the financial security of your child.

 The full sum insured is paid immediately to the family on death.

 The plan continues, as you had wanted funds to be available at your child’s age 20 years.

 Your family does not make any contributions henceforth. All the future contributions are made by the insurance company into the plan, so that the corpus required at age 20 is achieved.

 At your child’s reaching 20 years of age, the full maturity proceeds (sum insured + bonuses / fund value ) is paid out to your child once again.
This money is available to your child exactly when he/she needs it, not before not later. It can then be used to fund the educational / marriage requirements of your child.

When all the above features are made available to you, naturally there is going to be some cost associated with it. In this example, you would need to invest much more than the Rs4,500 per month to achieve your target of Rs22 lakh or settle for a lesser amount after 15 years for the same contribution, as it is already well known … there are no free lunches!      

The writer is a certified financial plannerCM with Roongta Securities. He can be reached at harsh@financialsuraksha.com