The parents in India are faced with issue of rising education costs. Today children’s education, their career and their future has become a serious issue for parents. The reason behind all their worries can be attributed to ignorance and not saving enough. Therefore, the people have begun to make conscious efforts in making investments to secure their child’s future. In order to capitalise on such parents’ worry many insurance as well as mutual fund companies have introduced many child oriented plans. There is need to understand whether these investments made by the parents are actually securing the children’s future as promised or not. According to a recent survey conducted by Economic Times majority of parents start investing money for the benefit of their children as soon as they are born and there are those parents as well who had started saving and investing even before the baby was even born!
Child Plan
Firstly we must understand as to what is a child plan. A child plan is nothing but insurance cum investment plan which is offered by insurance companies wherein the parents begin to invest in the child plan right from the moment the child is born. Premium is collected from the parents on a periodic basis by the insurance company. Such savings can be withdrawn either when the child attains majority or after certain intervals depending on the insurance companies’ policy.
Mutual Fund
Now, we need to understand what is a mutual fund? A mutual fund is an investment scheme which is managed by professionals on your behalf. Funds are pooled from a number of investors and these funds are invested by the mutual fund company to purchase securities. They are basically collective investment vehicles. The mutual fund companies in turn charge various expenses from their customers for example entry load or exit load etc.
Why Buy a Child Plan?
- In the event of untimely or early death of parents, the insurance coverage offered by a child plan is high at a comparatively low cost.
- In case the policyholder dies an ad hoc amount is given to the nominee but a unique benefit of a child plan is that even on the death of policyholder the policy does not come to an end.
- The premiums to be paid in the future are waived and the money is continuously invested by the insurance company on behalf of the policyholder.
- Furthermore, child plans are being offered in the portfolio by all the life insurance companies.
- The death of the policyholder does not derail or hinder the investment plan for his child.
- A child plan will make the parent continue to invest one year after another thereby ensuring that enough money is saved.
However, the disadvantage of a child plan is that higher mortality charges are levied for the child as compared to those charged under an ordinary ULIP. The child plans rate poorly in terms of investment option as well as in terms of life cover.
Why to invest in Mutual Fund?
We shall now consider the benefits of investing in mutual funds for children:
- In order to take care of the long term needs of your children, disciplined investing is required and the mutual funds for children are the way to go.
- Higher returns can be achieved with the help of the investments in such mutual funds.
- Mutual funds for children set aside and divide funds for specific goals. It becomes easier for a parent to assess the investment for a specific goal and then take corrective action if the growth and returns do not match their expectations.
- The tax efficiency of the debt based funds especially make the investments in mutual funds more profitable for the long term.
- If the investment is made in the child’s name then the tax implication can be easily deferred by the parents for years. And even at the time of withdrawal one can enjoy the indexation benefits as well. So it is a win- win situation.
Conclusion
An average, middle class investor lacks the discipline required in creating wealth. For such small investors who are unnerved by the volatility of the market to invest money in a child insurance plan rather than putting ones hard earned money in a mutual fund for securing the future of the children. But on the other hand, there many advantages of investing in a mutual fund as well as the mutual funds especially designed for children ensure long term benefits.
Therefore, we can conclude that one must evaluate to decide as to where they wish to invest their money to secure the future of their children. This decision ultimately depends on the needs, potential, expectations and risk appetite of the investors, who in this case are the parents!
