For all you parents, your child is your bundle of joy, the source of all happiness. You want the very best in life for your child in terms of education and medical facilities and you know that in order to achieve that, you need to start planning early.
As it is, quality education is getting expensive by the day. Years later, things are only going to get worse. So the sooner you start, the better it is.
However, what do you do? Which are the products you should turn to? What will offer the best advantage to your child, and on the flip side, what it is that you should avoid?
This article tries to address these questions and more.
The key is to start early. However, when it comes to actual investing, most parents look for investment products that are actually termed as 'Children's Plans.' This in itself is the 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 Public Provident Fund (PPF), RBI bonds, mutual funds, Post Office instruments and, of course, pure equity (stocks).
Note that 'Children's Plans' from insurance companies haven't been mentioned in the above list, in spite of the fact that it is the insurance companies that offer the maximum products in this category.
There is a reason for this. Most children's insurance products are nothing but modified endowment or money back policies. The label is changed, the product is more or less the same.
Putting it differently: Naam badalne se kaam nahi badalta. For, all 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, bonuses that insurance companies declare are not on a compounded rate basis.
This neither benefits the child nor the parents. Plus, think about it, your child does not need insurance. The parents are not dependent on the child for their standard of living. So the demise of the child, howsoever devastating emotionally on the family, will not make any difference in the standard of living.
Consequently, most endowment or money back policies (whether in your name or the child's name) offer an extremely low return over a long period of time. 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.
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.
What your child needs is capital growth --- as fast as is safely possible. Nowadays, ULIPs (Unit-Linked Insurance Plans) have also started being marketed as Children's Plans. Again, if it is a traditional ULIP or that of a Child Plan, it still remains an ULIP. Understand the expense structure well before committing your funds; some ULIPs have a very heavy front-end expense structure.
Even mutual funds that offer the so called Children's Plans are nothing but liquid or balanced funds with a higher lock-in period. There is no point in investing in such plans except of course locking in your funds.
Which brings us to the moot question: then what is a good investment for a child?
One of the answers is PPF. Yes PPF, an instrument which is generally considered to be 'Adults Only.' Consider this: say, 20 years from now, you require around Rs 22-25 lakh (Rs 2.2-2.5 million) for your child's higher education. Around Rs 5 lakh (Rs 500,000) needs to be earmarked for marriage. All this can be very simply catered for by doing the simple thing of investing Rs 70,000 in your child's PPF account every year.
If you do this, 20 years from now, you will have an astounding amount of around Rs 32 lakh (Rs 3.2 million) at your disposal, which you can use for the education and marriage of your child and still have some left over. Such is the power of compounding and selecting the right plan.
The strategy
Most people mistake financial planning for the child to mean transferring capital in the child's name. This is neither necessary nor enough. 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 prudent 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.
The instruments
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. However, you may choose a particular instrument for your own personal investment, it need not be the same in the case of your child.
For example, since your child does not require the funds immediately, the money can grow over a long period of time. Which means one of the best modes of investment is equity.
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.
Diversified equity funds
Our advise is don't dabble in the share market on your own. Also, never, never, listen to anyone's tips. That's a sure fire way of losing money. Instead, allow professionals to do the hard work for you. This you can do by investing in diversified equity mutual funds of a quality pedigree.
These are extremely flexible instruments that offer the optimum mix of return, risk, liquidity and tax-efficiency.
Not for a moment are we suggesting that you invest all the money kept aside for the kids in these instruments. However, every month, earmark a certain sum to be invested. These instruments also allow you to invest as little as Rs 1,000.
For those who require a disciplined approach, the Systematic Investment Plan (SIP) is available. You can give post dated cheques for six or twelve months and the investment would be automatically done on your behalf. There are several other benefits to an SIP, but space constrains don't allow a detailed discourse.
The point that your money is your child's money -- if you invest it well, it is your child who will benefit -- cannot be emphasised enough.
The bottom line? 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 an 'Under PG' (Parental Guidance) one.
The writer is Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at sandeep.shanbhag@gmail.com