How to SECURE your child's financial future

A look at some investment options available for planning your child's future.

The birth of a child is an occasion of extreme happiness for the family but it comes along with an additional responsibility for the parents, which is not just physical and mental but also financial in nature. It is the wish of every parent to give their bundle of joy the best possible upbringing, which among other things would include quality education and financial security. Most parents today want to start planning for their child's future as soon as the child is born.

Financial planning for children entails the creation of a corpus for expected future expenses such as child's higher education and marriage and also ensuring that there is an adequate security cover during their growing years.

The first important step in planning for child's future is to determine the amount of expenditure which would have to be incurred in future on different goals such as education, marriage and so on. Since these goals may be in distant future, one must consider the impact of inflation. For example, if the cost of higher education is Rs 15 lakh today, assuming an inflation of 5% this cost will rise to Rs 31 lakh after 15 years.

Hence, one needs to invest keeping in mind the inflation adjusted future expenditure. Like planning for any other goal, a good mix of equity, fixed income products and insurance works well for meeting child related goals. While equity can provide growth of capital, fixed income provides stability and insurance provides the necessary security cover.

In the past, people would invest in property or buy gold or shares, to be used once the child grows up. In the more recent past, there has been a plethora of financial products which are dedicated to meet the children centric goals.

The author is chief evangelist, Perfios.com

Insurance plans for children

This is indeed the most popular product when it comes to planning for the child. And in this case, it isn't really the product that is exceptional, it's the marketing techniques employed by the insurance companies which works in their favour. There are two variants of the children insurance plan – the endowment plan and the unit linked plan (ULIP). The endowment plans have an option to make staggered payments at different ages of the child until maturity of the plan whereas in unit linked plan, it is possible to get lump sum amount at a desired age.

The advantage of a ULIP is that one can choose a suitable investment option based on risk appetite. If the child's education is more than 15 years away, one may want to invest in an equity option rather than fixed income or opt for a combination of both.

Ideally, the policy should insure the parent and child should be the beneficiary. Incase the policy is taken in the name of the child, the rider 'waiver of premium' should be attached to ensure that in case of death of the parent, the insurer continues to pay the premiums.

Child plans are usually expensive products and one must be wary of the costs involved. Also, in case of ULIP's one must choose a plan which has a good track record of performance. Again, if you are a disciplined investor and have built in the cost of education in your term insurance, you may steer clear of a child plan.

Mutual funds

Instead of taking a child specific insurance plan, one can also choose to take adequate insurance on ones life in the form of term plan (factoring in critical goals such as child's education and marriage) and invest systematically in mutual funds to meet the child's future needs of education and marriage.

While one can invest in a good diversified equity or balanced open ended scheme, some fund houses also have children specific funds which come with a lock in period. It is not possible to withdraw from these schemes before the specified tenure. Some of these funds even provide additional life insurance cover.

Other options

For the more risk-averse investors who do not wish to take undue risk for meeting these important goals, Public Provident Fund (PPF) is a secure investment which provides 8% tax free return. The only disadvantage is that one would have to limit the investment to Rs 70,000 per year which may not be enough to meet the goals. Investing in gold in order to take care of the needs at the time of wedding may also bear fruit with the gold prices steadily rising.

There are multiple investment options available to parents today to plan for their child's future needs and choosing the right ones is no child's play. Hence, it is important to pick the right combination based on factors like one's disposable income, cost factor, risk appetite, time available and most importantly long term financial goals.