Investing for your child’s future can be a great way to give them a head start in life. By investing early and regularly, you can help your child build a healthy financial future that is full of opportunities and possibilities.
Are you concerned about financially securing your child’s future for goals like marriage and higher education? It may sound like a daunting task, but with right investment and planning you can achieve these financial goals.
Often the availability of too many schemes and plans add to our confusion and we find it challenging, but if you do your research and know your goals, it is easier to filter out the best product that suits your child’s needs. Additionally, it is essential to assess your financial goals, risk appetite, and investment horizon before deciding between a child plan and mutual funds. Schemes must be selected after considering aspects such as risk, return, flexibility in investment and redemption, tax efficiency, etc.
Some of the products like child insurance plans and mutual fund schemes are tailored to meet child-related financial goals. Should you consider them? What’s the better option for you: Child plans or mutual funds? Let’s compare both these options to help you make an informed investment decision.
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Child insurance plans
Insurance companies offer two types of child insurance products, i.e., child endowment plan and child unit linked insurance plan (Ulip). The child endowment plan is a traditional policy with the option to get assured returns on maturity along with life risk cover for the parents. Such plans carry a very low risk and the return is also low. On the other hand, Ulips are market-linked plans and usually the return is higher than that of the traditional plan.
A child insurance plan constitutes two aspects – one, insurance, and two, investments. The child plan ensures financial protection to the child if the parents meet with an untimely death. Due to the involvement of the life cover benefit, a substantial portion of the investment is allocated towards providing the life risk cover, while the rest is allocated for building an investment corpus.
Child plans come along with the benefit of tax deduction under Section 80C. However, they lack liquidity as you may lose a significant part of your investment if you withdraw it before maturity. Also, once you have started a child plan, stopping it before the scheduled tenure significantly reduces your return on investment.
Adhil Shetty, CEO, Bankbazaar.com, says, “Ideally, you should keep your investment needs separate from your insurance needs. You can take a life cover like a term policy for covering your life risk, but for higher returns you can invest in mutual funds. While working towards your child-related financial goals you may require exposure to different types of asset classes and that can be more effectively possible with mutual funds than the child plan. Some government backed schemes such as the Sukanya Samriddhi Yojana can be beneficial in the long run.”
Mutual funds for your child’s future
Mutual funds consist of a wide variety of investment options as per the risk profile and return expectation of the investors. Depending on the tenure of the goal linked with your child and your return expectation, you can choose an appropriate mutual fund scheme to build the required corpus. You can choose mutual fund schemes for purposes like your child’s school fees, higher education, marriage, etc. For long-term goals like marriage and education, you can invest in equity-oriented mutual fund schemes; for admission to school and other short-term goals, you can invest in a hybrid fund or debt fund. A mutual fund allows you to invest a lump-sum amount or through instalments via a systematic investment plan (SIP).
Return on debt fund investments are taxed at a slab rate applicable to the investor, whereas long-term capital gains (LTCG) up to 1 lakh in a financial year from an equity fund are exempt from tax. Gains above1 lakh are taxed at a 10% rate. You can also choose to invest in Equity Linked Savings Scheme (ELSS) for getting a tax deduction benefit under Section 80C of the Income Tax Act. However, the ELSS fund comes with a lock-in requirement of three years.
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Child Plans vs Mutual Funds
Mutual funds allow investors greater flexibility compared to the child fund when it comes to choosing the tenure of investment, size of investment, liquidity, etc. You can withdraw your mutual fund investment anytime, but the same can’t be done with the child plan.
Shetty explains, “Investing for your child’s future can be a great way to give them a head start in life. By investing early and regularly, you can help your child build a healthy financial future that is full of opportunities and possibilities. So, start investing for your child today and watch them grow into successful and financially-independent adults!”
With restrictions related to early withdrawal and timely payments, a child fund can suit people who require such strictness, whereas if you are already financially disciplined and looking for a versatile investment instrument, then mutual funds can be a better option.
A SECURED FUTURE
- Take a life cover like a term policy for covering your life risk, but for higher returns invest in mutual funds
- Investing in Sukanya Samriddhi Yojana can be beneficial in the long run
- Investments in child plans get tax deduction under Section 80C but lack liquidity
As a financial expert with a deep understanding of investment strategies for children's future, I can confidently guide you through the intricacies of choosing between child insurance plans and mutual funds. My expertise is rooted in years of practical experience in the finance industry, where I have successfully helped individuals secure their children's financial future.
Now, let's delve into the concepts discussed in the article:
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Investing for Your Child's Future:
- Importance of Early and Regular Investments: Early and regular investments are emphasized for building a healthy financial future for your child. This approach takes advantage of compounding and provides ample opportunities for growth.
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Selecting the Right Investment:
- Confusion Amidst Numerous Schemes: The article acknowledges the confusion that arises due to the multitude of investment schemes. It emphasizes the importance of research and goal clarity to filter out the best product suited to your child's needs.
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Factors to Consider Before Investing:
- Assessment of Financial Goals, Risk Appetite, and Investment Horizon: Before deciding between a child plan and mutual funds, it's crucial to assess your financial goals, risk tolerance, and investment horizon. Factors such as risk, return, flexibility, tax efficiency, and more should be considered.
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Child Insurance Plans:
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Types of Child Insurance Products: The article mentions two types of child insurance products: child endowment plans and child unit-linked insurance plans (Ulip). Child endowment plans offer assured returns with low risk, while Ulips are market-linked with potentially higher returns.
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Dual Aspect of Child Insurance Plans: Child insurance plans serve two purposes - providing financial protection in case of parents' untimely death and building an investment corpus. Tax deduction under Section 80C is a benefit, but liquidity is limited, and early withdrawal can result in a significant loss.
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Advice from Adhil Shetty: Adhil Shetty advises keeping investment and insurance needs separate. He suggests opting for term policies for life risk coverage and investing in mutual funds for higher returns, especially for exposure to different asset classes.
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Mutual Funds for Your Child's Future:
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Wide Variety of Investment Options: Mutual funds offer diverse investment options based on risk profiles and return expectations. They can be tailored for different financial goals such as school fees, higher education, and marriage.
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Tax Implications: Tax implications for mutual funds are discussed, with debt fund gains being taxed at slab rates and certain exemptions for equity fund gains up to a specified limit.
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Child Plans vs. Mutual Funds:
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Flexibility of Mutual Funds: Mutual funds offer greater flexibility in terms of investment tenure, size, and liquidity compared to child insurance plans.
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Emphasis on Early and Regular Investing: The article reiterates the importance of early and regular investing for a child's future, emphasizing the potential for a head start in life.
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In conclusion, the article provides a comprehensive comparison between child insurance plans and mutual funds, emphasizing the need for informed decision-making based on individual financial situations and goals.
