Giving proper education and securing the future of children till they become financially independent is a major concern for every parent. Along with retirement planning and plan to buy a suitable house etc, plans for marriage of children also form part of future plans of the parents. But the major issue is how to plan and invest to fulfill the dreams.
While it is important to realise the aspirations of the children and calculate the cost of education needed to fulfill the aspirations, parents should first accept the reality that all the investments needed during the course of time may be done to accumulate the funds needed only when the earning member of the family is there. In case of unfortunate demise of the earning member, all the plans may fall apart and the dependents may struggle for survival. So, before implementing the investment plans, making the future financially secure to be given priority.
Following are some instruments, which may be used to financially secure your child’s future:
To fulfill the dreams of children, it is utmost important to insure the life of the earning member of the family, so that the dreams may be fulfilled even if the breadwinner dies prematurely. There are insurance plans available for children with premium waiver benefit to ensure that goal oriented insurance would continue even without premium after unfortunate demise of the life assured, but the rate of return on such policies are generally too low to accumulate sufficient amount to finance child’s education and other needs. Moreover, a child insurance is useless, if it provides cover on the child’s life instead of the earning parent’s.
So, it is better to take affordable term insurance for the earning member of the family by paying low premium and invest rest of the money in proper manner to ensure that the child’s dreams are fulfilled.
Sukanya Samriddhi Yojana
For girl children, parents have the option to invest in Sukanya Samriddhi Yojana (SSY), account of which may be opened for a girl till she becomes 10 years old. It is a government scheme and hence is fully secure and tax free. The maturity period of SSY is 25 years or till the girl gets married, whichever is earlier. Partial withdrawal may be made after the girl becomes 18 years old for her educational expenses.
Although it is fully secure and tax-free scheme, but making long-term investment at a fixed interest of around 8.5 per cent may result into loss of opportunity to get higher return by taking some calculated risks. Moreover, the rate of inflation in education sector is more than the rate of return in SSY and also investment in the scheme can’t be done for a male child.
Public Provident Fund
Investments may also be made in a Public Provident Fund (PPF) for both male and female child. PPF is also a government scheme and is fully secured and tax free, but the rate of interest is slightly lower than that of SSY.
If you have enough money, you may spare some to invest in PPF and/or SSY to take advantage of sovereign guarantee and tax benefits, as like SSY, investing PPF at a fixed rate for long period would result into opportunity loss. Moreover, both SSY and PPF have cap on maximum investment in a financial year, which currently is Rs 1.5 lakh each, so you may not accumulate sufficient funds for all your needs through these two investment avenues.
Unit-Lined Insurance Plan
Unit-Lined Insurance Plans (ULIP) are market-linked products that provides better return than other endowment insurance plans in long run along with insurance cover. Investments in ULIPs are also completely tax free and you may invest for both son and daughter.
However, due to quite high expense ratio, the return as well as insurance cover tend to be lower than what you need.
Market fluctuations pose risk on short-term returns of mutual funds (MFs), but the risk gets reduced over time, giving the investors superior return in long term at a rate higher than the rate of inflation in education sector and other fields. As financial plans for children are for long periods, by starting systematic investment plans (SIPs) early, you may accumulate the funds required for education and other purposes of your children, provided you invest adequate amount, determined through proper financial calculation, at regular intervals and don’t take money out prematurely for any other purpose.
There are some children centric funds that disallow premature withdrawals or make such withdrawal expensive by putting heavy exit loads to ensure that investors stay invested to accumulate funds for child’s future, but you would lose your control and would not be able to pull your money out in case such funds don’t perform as expected.
Depending on your financial need, ability to invest, time left to accumulate funds and your capacity to take risk, you may choose an investment avenue or invest in a combination of instruments to invest for your child’s future.