Open the door to your child's future

Opening the Door to Your Child's Future

Start saving early to build a bigger corpus for your child, say experts

Becoming a parent may be called the single most satisfying experience in the world. Your child is what you will truly call an extension of yourself, a human being who you are responsible for. Your child is completely dependent on you. To guide him through the path of life, you are his guiding light and he looks up to you. The previous generation may have told you that the child comes with his own destiny, but you as a parent know that you will have a very critical role to play in shaping it.

You are the child's provider and must be able to see beyond the immediate need of providing for your child. If you do not plan well, you are bound to run into financial roadblocks at critical junctures of his life.

As a parent, you're willing to deprive yourself of luxuries in order to provide a long-term financial security to your child. In many cases, a happy by-product of this exercise is that the child grows up to be aware of the virtues of fiscal prudence.

One Generation Plants The Trees; Another Gets The Shade. - Chinese Proverb

The Building Blocks:

"Every couple must set specific milestones and resolve to reach them through savings. It's easy to assess your performance midway and make adjustments such as revising the milestone, increasing your savings or pushing your horizon further," says private wealth management firm Client Associates' founder-partner Rohit Sarin.
 
The Consumer Attitudes to Savings Survey conducted by Aviva Life Insurance shows that 32% of Indians are motivated to save for the education of their children as against the global average of 17%. Fund Houses and insurance companies play heavily on this streak of parental responsibility. They insist that it is only through their targeted schemes that you can afford to take care of your child's future. Most of us buy this line of thought.

When the economy was buoyant and the markets were booming, it didn't really matter. But in these difficult times, every percentage point of return matters. So you must consider whether these plans will create wealth for your child or a regular investment strategy will work better for you.

Getting It Right With Insurance:

While beginning to save for your child's future, insurance is the most likely consideration you can make. Today there are many children insurance plans that help you save regularly for your child's need. A common misconception is that child plans insure the life of the child. This, if you pause to think, doesn't make sense.

 A child plan insures your life but makes sure that the benefits go to the child. Sure, you think that you are going to be there with your child to hold his hand through every trial in life but in case of unfortunate occurrences at least financial security will see him through a rough patch without much difficulty.

 As a parent you want to be able to provide everything for important milestones in your children's lives. Expenses for education are a critical component and are on a steep rising path. Consider this, apart from entry into preschool; admission to primary school will cost you Rs 5,000 to Rs 50,000. College education will cost Rs 3 lakh to Rs 10 lakh. An MBA course, Rs 7.5 lakh, and if your child wants to pursue higher studies abroad and an MBA course that costs Rs 15 lakh today will amount to Rs 31 lakh after 15 years, considering that the inflation is 5%. To accumulate this sum over a period of 15 years, you would have to save Rs 7,500 per month assuming a growth of 10%. But do not be intimidated by these numbers. There is help at hand.

When Do You Start?

In order to build a bigger corpus for the child, one needs to start saving early. The best time to start is at the time of the birth of the child. If you have missed that stage you could begin when your child starts going to school. While choosing a children plan, one must keep in mind important milestones in the life of the child such as graduation, post-graduation, career and marriage.

If your insurance is insufficient you could consider a children plan. "A child plan gets you a head start to create a financial corpus for your child," says Aviva India's director of marketing Vishal Gupta. Simplistically speaking, these are tailor-made life insurance products that are designed to meet the financial needs of your children, be it higher education, marriage or helping them begin their career. Children plans can be purchased against the life of any parent with the child as a nominee. These plans are designed to provide a lumpsum on maturity.

There Are Only Two Lasting Bequests We Can Hope To Give Our Children. One Is Roots; The Other, Wings. - Journalist Hodding Carter

All children plans come with two options. Under one variant, the payment to your child is staggered over various life stages. For example, 20% of the sum assured to the child is paid on his 21st birthday, 20% on his 24th birthday and the remaining 60% when the policy matures. Under the second variant, one gets a lumpsum at the desired age.

One feature that makes a children plan unique is that the policy continues even after the policyholder's death. The insurer pays the sums assured immediately to the nominees. Along with that the insurer also pays the premium through the term of the policy. In some policies, this feature is inbuilt and can be added as a rider. It assumes significance in children plans as it ensures double security at no extra cost for the child in case of the death of a parent.

Children Plans - The Options Within:

From a plethora of children plans available today, you can choose between an endowment plan and a Unit Linked Insurance Plan (ULIP). An endowment plan is a profits-based or a bonus-based plan, and is dependent largely on the profits and surplus generated by the insurer. An endowment plan's modus operandi is similar to a bank Fixed Deposit, because once the returns come in the form of bonus, they get attached to the policy and the policy is guaranteed.

When I Approach A Child, He Inspires In Me Two Sentiments; Tenderness For What He Is, And Respect For What He May Become. - Scientist Louis Pasteur

ULIPs on the other hand, are products that combine a life cover with an investment plan. However, the investment does not guarantee returns like money back or an endowment policy, but works like a Mutual Fund. With ULIPs, it is difficult to estimate a final corpus as they are subject to market volatility. According to your risk appetite, choices in ULIPs can range from 0% exposure to equity to 100% exposure to equity.

If your risk profile does not allow you to take risks through equity exposure, bonus-based endowment plans could be your best option. But if you are willing to take the risk, choosing ULIPs would be the ideal thing to do as it creates wealth for your child.

Alternate Routes To A Secure Future:

The other vehicle of investment can be Mutual Funds. At the very basic level, a child plan offered by an asset management company is very similar to a balanced fund, which has a portfolio of both equity and debt instruments. Therefore, one of the biggest benefits these funds offer is that of automatic rebalancing of the equity and debt components. So, if due to market appreciation, the equity component begins to grow, the fund manager will book profits at systematic levels to guarantee an optimum balance.

However, one needs to make a distinction between a child plan offered by an insurance company as against one offered by an asset management company. In the case of the former, there is a clear insurance cover on the life of the policyholder, whereas in case of Mutual Funds, the insurance cover offered can, at times, be misleading. In most of the schemes, the insurance cover offered is only a personal accident cover.

While child-oriented insurance plans have their merits, financial experts do not attach much significance to child-oriented Mutual Fund schemes. They say that a diversified Equity Fund is a much better option than a targeted fund. There are several reasons why such targeted funds have not done well.

For one, these funds have a small asset base. Also, most of them are heavily tilted towards debt instruments, and hence, fail to gain from the power of equity compounding. Most importantly, these funds do not come with lock-ins. So, despite a long-term goal, investors can exit whenever they want. While some investors are disciplined, many others might decide to exit early, in which case the fund will not be able to gain from its long-term investments.

Customize Your Child's Future Kitty:

For those of you who are not interested in insurance plans or targeted schemes of Mutual Funds alone, financial planners suggest a healthy mix of equity and debt to secure the future of one's child. In order to create wealth for your child, your portfolio needs to be skewed towards equities and large cap stocks and blue chips at that. Also have a fair share of equity diversified funds and mix it with some portion of debt. Investing in a PPF which gives 8% tax-free return and is a long-term product could be a good option. The PPF is a government sponsored scheme with a 15-year lock-in period. So if you save Rs 70,000 a year in PPF, you'll get Rs 19 lakh in 15 years-at virtually no risk.

The Last Word:

Whether you buy targeted schemes or customize your portfolio to secure your child's future, financial planners strongly recommend you to keep a constant eye on the proceedings. In times of uncertainty, even if there is a mental block on touching the child's money, do not hesitate to rejig the portfolio if need be, advise planners. Also keep in mind the inflation adjusted returns when you ascertain the value of your portfolio. Prudent early decisions can help you achieve the parental pride that will come from seeing the dreams of your children turning into reality!