Planning for your child’s future in advance can lower your financial stress.According to the latest reports, the cost of education in India is rising at a rate of 10 to 12% every year.Your child’s higher education is one of the major cash outflows that you must plan for. Fees for an engineering course todayis around Rs.6lac and is expected to touch Rs.12lacs in coming 6years, and by 2027, it would reach around Rs.24lacs.
While most of us are aware about the importance of planning for our child’s future, we fail to acknowledge its importance when the child is born. We plan for our children’s graduation, post-graduation and marriage, but do not consider the increase in our expenses right after the baby arrives. These expenses may include medical andhealthcare expenses, cost of hiring a nanny, schooling and even taking our little ones for vacations. These expenses can upset your budget and subsequently hinder your plans to save for the future.
When it comes to planning for your child, starting early helps yourealize your financial goals (for your child) and prepare for life’s eventualities in a better manner. The pre-baby arrival stage is as important as the post-arrival stage. A comprehensive policy can help you plan,prioritize, and investfor your child’s daily expenses, education and marriage at the same time accordingly.
Child plans provide security against constraints such as inflation and rising cost of education. They also ensure financial security of your child even in your absence. The maturity payout of a child plan can be interval based or in lump sum. The advantage of a child plan vis-à-vis other investments is the risk cover provided by these plans.
Child insurance plans are available as traditional and unit-linked (ULIPs). A traditional child insurance plan invests your premiums mainly in debt instruments, such as corporate bonds and government securities, and offers guaranteed returns on maturity. It bears relatively lower risk and is suitable for parents who do not have a large risk appetite.
Parents who havea higher risk appetite can invest in unit-linked child insurance plans that investyour premiums across equity and debt markets. However, such plans prove to be advantageous over along term (about 15 to 20 years) as equities add a considerable amount to the corpus.
The abundantvariety of child insurance plans existing in the market can be a little intimidating, especially if you are a new investor. Hence, it is important for you to keep the following factors in mind before investing in a child plan:
Planning well in advance (10yrs +) for your child’s future provides you with an opportunity to invest inrisky asset classes such as equity. Should your investment suffer any setbacks, it can be easily recovered if you have sufficient time in hand. This gives you a greater flexibility and opportunity to grow your wealth.
However, if the financial goal is 5-7years away, you must avoid investing in high-risk asset classes and instead, balance your portfolio with investments in equity, debt instruments and fixed income products. If your goal is just few years away (2-3years), you must completely avoid investing in equities and shift your investment to debt and fixed income products.
As per section 80C of the Income Tax Act 1961, the premium paid towards child plans are deductible from your total income and hence, it qualifies for tax exemptions. Moreover, as per section 10(10D) of the income tax act, the lump sum amount that one gets as survival benefit during maturity is also tax free.
Here is a list of investment options you can choose from, depending on the age of your child:
Unlike traditional insurance plans that do not guarantee money availability for paying your child’s education fee (in case of your untimely death), child insurance plan protects your savings for securing your child’s future. The amount you set aside for this will be made available to your child only at the end of the plan. If you have 15-18years left before your child starts college, child insurance plan should be the preferred investment option for you.
Low-cost ULIPs have been proving to be a tough competition for the mutual funds. The new avatar of ULIP is packed with features that have removed earlier redundancies. The first advantage is the tax efficiency of these plans. The newer version of ULIPs comes with 5year lock-in period. They are cheaper as the overall administrative and fund management charges are in the range of 1% to 2.25%
Investment in mutual funds would cost you less than any other instruments. A balanced open-ended scheme that would offer more liquidity will help you save money for your long-term goals. However, don’t forget to look at asset allocation before investing in mutual funds as more allocation in equity could increase your risk.