Investment planning for children: How to choose the right investment option to secure your child's future Choosing the wrong investment is a common problem. It becomes even more acute while saving for critical long-term financial goals such as childrens education and weddings. Many of the challenges faced by investors can be avoided if they take professional advice on investments and finances. How to invest in the right instruments and buy protection for your child
Chaitanya Joshi is an early bird when it comes to investing for his son’s goals. “I started investing in the year that Swaraj was born,” says the Mumbai-based marketing professional. It was a smart decision because an early start lends the power of compounding to investments and helps beat inflation. “Education expenses are rising faster than normal inflation, which is around 5%. Parents must start investing very early for this goal,” says Dhaval Kapadia, Director, Ambit Wealth Advisors.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} While Joshi started early, the vehicle he chose to reach his destination was not quite appropriate. He bought a traditional life insurance policy to save for his son’s education. For an annual premium of Rs.80,000, the policy covers him for Rs. 8 lakh and will start annual payouts when Swaraj turns 16. The returns work out to less than 6%. “Traditional insurance policies are not the best investment. They usually offer very low returns,” says Rohit Shah, Founder and CEO of GYR Financial Planners.
Choosing the wrong investment is a common problem. It becomes even more acute while saving for critical long-term financial goals such as children’s education and weddings. Going for the wrong investment option could leave you with a shortfall in the target amount and jeopardise your planning. A study by financial planning firm, Finsafe India, shows that one out of three investors do not know where to invest. “This indicates a strong need for better financial education and investment guidance,” says Mrin Agarwal, Founder and CEO, Finsafe India.
Take professional advice
Many of the challenges faced by investors can be avoided if they take professional advice on investments and finances. If they are willing to pay, a good fee-only financial planner or a registered investment adviser will be able to guide them better. Unfortunately, most investors don’t want to pay for advice because they can get it for free from a relationship manager or an insurance agent. However, this free advice often turns out more expensive than the charges for a qualified financial planner.
Note: “Traditional life insurance policies are not the best investment. They usually offer very low returns that can’t beat inflation.”ROHIT SHAH
FOUNDER & CEO,
GYR FINANCIAL PLANNERS
Chaitanya Joshi,with son Swaraj (10)His goal
Build a corpus of Rs.1.5 crore in 8 years when his son will be 18.
Instruments used
Traditional endowment insurance policy with an annual premium of Rs.80,000, a Ulip he has stopped investing in after paying Rs.4 lakh annual premium for five years, Rs.15,000 SIPs per month in equity funds started in 2018, and Rs.1.5 lakh a year in the PPF for past eight years.
Our assessment
He is on track and can reach his goal with disciplined investing. The traditional endowment policy is a drag. Closing the Ulip was not a good idea, especially since it provides life cover and helps build a tax-free corpus. He should consider restarting it. The SIPs in equity funds should be continued for at least the next 5-6 years.
Joshi had bought a Ulip to save for his son’s education with an annual premium of Rs.4 lakh and a life cover of Rs.40 lakh. However, after five years, he stopped paying the premium because he didn’t know when to switch from equity funds to debt funds in the Ulip. “The insurer did not offer any advice on switching, so I stopped paying the premium,” he says.
Note: “Education expenses are rising faster than normal inflation. To beat this increase in costs, parents need to start investing early.”DHAVAL KAPADIA
DIRECTOR, AMBIT
WEALTH ADVISORS
A financial planner would have guided him better. Ulips are insurance policies, so the proceeds are tax-free under Section 10(10d). The recent tax changes proposed in the Budget for mutual funds and stocks make Ulips even more attractive. Though Ulips bought after 1 February 2021 are taxable if the annual premium exceeds Rs.2.5 lakh, Joshi had bought his plan much earlier, so his policy continues to be tax-free. He should seriously consider restarting the Ulip and seeking help from a financial planner to manage his investments.
Insurance is the bulwark of any financial plan, but it is also the least understood financial product. Pune-based software professional Sanjay Sharma ticked all the right boxes when he invested in a diversified portfolio of stocks, equity funds and fixed income schemes for his children’s education. However, even though he is the sole income earner in the family, Sharma has no contingency plan if something untoward happens to him. A Rs.2 crore term insurance cover will cost Sharma about Rs.35,000 a year, but will safeguard his family’s financial future.
Sanjay & Ruchi Sharma, with son Vihaan (9) and daughter Aastha (1)Their goals
Targeting a corpus of Rs.50 lakh for son’s foreign education in nine years and Rs.1 crore for daughter’s studies in 17 years.
Instruments used
Diversified portfolio that includes Rs.32 lakh in equity and hybrid mutual funds, Rs.12 lakh in the PPF and Sukanya scheme and sovereign gold bonds worth 3.5 lakh. They put Rs.28,000 in mutual funds and Rs.25,000 in the PPF and Sukanya every month.
Our assessment
Portfolio is well-diversified and investment options are also fine. However, as a sole income earner, Sanjay needs to buy a life cover of at least Rs.2 crore to safeguard his children’s goals. At 39, this will cost him around Rs.35,000 per year, but will protect the family’s financial future.
A professional planner will be able to guide the individual on the appropriate insurance policies that fulfill his requirements. For instance, the planner may suggest a comprehensive health insurance policy for the entire family, instead of a costly critical illness plan that covers specific diseases. He may recommend a pure protection term insurance plan, instead of the costly endowment policy the agent is trying to push.
Safeguard your child’s goals
Life insurance is essential and cheap. Here’s the cost of a Rs.1 crore cover till 60.
Obsession with assured returns
The Finsafe study claims that there is growing interest in equities and mutual funds. Financial planners have long maintained that if your goal is more than 5-6 years away, a major chunk of your portfolio should be in equity-based instruments. Data also shows that in the long term, equity-based investments deliver the best returns. Yet, the study says that close to 36% prefer traditional avenues such as insurance policies and bank deposits that offer assured returns. This obsession with assured returns makes them content with the suboptimal 5-6% returns offered by these investments.
Factor in inflation when you plan
Education costs are rising at around 10% every year, while wedding expenses go up by 7% annually.
Note:“Investing in equity funds can be risky when the goal is less than five years away. I tell clients to move to stable options.”SHILPA BHASKAR GOLE
FOUNDER, NERDYBIRD
FINANCIAL WELLNESS
This doesn’t mean that fixed income products don’t have any place in the investment portfolio. In fact, they are essential to give stability to the portfolio, especially when the goal date comes near. Equity markets are inherently volatile and a sudden downturn can dent the corpus very badly. “Investing in equity funds can be risky when the goal is near. When the goal is less than five years away, I do not recommend equity, but tell my clients to move to the stability of fixed income options,” says Shilpa Bhaskar Gole, Founder of NerdyBird Financial Wellness.
Manish & Nidhi Mehrolia, with son Advait (1)Their goal
Investing for son’s education, but they haven’t set any target.
Instruments used
They have invested in a mix of equity and hybrid mutual funds (SIP of Rs.11,000 per month), stocks, physical gold and a recurring deposit of Rs.2,000. Manish has taken a term insurance cover of Rs.1 crore and pays a premium of Rs.17,000 annually.
Our assessment
They have done well to start early and diversify across assets. Disciplined investing can help build a big corpus over the long term. The term insurance for Manish safeguards the child’s goal. They need to set a target so that they know whether their investment is sufficient.
Small savings schemes such as the PPF and the Sukanya Samriddhi Yojana are good ways to save for your child’s goals. Both the PPF and Sukanya offer assured returns and tax-free interest. This makes these a much better option than bank deposits, where the interest is fully taxable at the slab rate applicable to the investor. Unlike bank deposits, however, there is an annual investment cap of Rs.1.5 lakh in both. Also, while the PPF can be opened by anyone, the Sukanya scheme is only for girl children below 10 years of age.
Mutual funds or Ulip?
Here’s how the two compare on key parameters.
Locking up in illiquid assets
Besides bank deposits and insurance plans, real estate is another favourite investment for risk-averse investors. Gurugram-based Jitendra and Chhaya Mathur have invested in two apartments for their sons. Though they also have investments in equity funds and hybrid schemes, there is not much surplus left after the Rs.72,500 home loan EMI. Like the Mathurs, Delhi-based Gaurav Shrivastava has also put his faith in real estate. The property he bought for Rs.57 lakh in 2020 has more than doubled in value to Rs.1.4 crore. “Real estate has given me very good returns. I plan to invest more in it. Most of my son’s expenses will be met with real estate,” he adds.
Jitendra and Chhaya Mathur,with sons Rohan (14) & Rahul (11)Their goals
Save Rs.30 lakh for their sons’ education in 4-7 years; Rs.50 lakh for their weddings in 11-14 years.
Instruments used
The Mathurs have a bulk of their investment in two flats they have bought for their sons. They also invest in equity funds and stocks for their education and have built a corpus of around 23 lakh. An insurance policy bought when Rohan was born was closed four years later. They pay home loan EMIs of Rs.55,000 and have SIPs of Rs.25,000 in equity funds.
Our assessment
They have chosen the right investment options, but need to factor in inflation when setting the targets for their sons’ education and weddings. Real estate provides peace of mind but is not liquid as an investment. A flat may not be very useful if the child moves to another city for work.
Gold has not beaten equities in the long term
The yellow metal is also not as stable as it is thought to be.
However, real estate is a very illiquid investment. It can take weeks, even months, to find a buyer willing to offer the price you expect. The legal formalities of the transaction also take time. The entry costs by way of stamp duty and other legal expenses incurred at the time of purchase are very high as well. Besides, unlike financial investments, real estate cannot be sold in parts. Financial planners say one should invest in real estate only if one already has enough financial assets.
What about gold?
Which Indian mother doesn’t accumulate gold for her child’s wedding? Pooja Saha is no exception. She diligently buys gold for her daughter, Pallavi, as does Nidhi Mehrolia for her son, Advait. Apart from the gold gifted on her wedding, Mehrolia started accumulating the yellow metal when her son was born, but her preferences have changed in recent years. “I thought physical gold was the safest investment and would give me good returns. But now I believe sovereign gold bonds are a better way to invest in the metal,” she says.
Deepak & Pooja Saha, with Pallavi (7)Their goals
Rs.30 lakh for studies in 11 years; Rs.50 lakh for wedding in 16 years.
Instruments used
A Sukanya account opened five years ago now has around Rs.11 lakh. A traditional insurance policy with an annual premium of Rs.21,000 will give around rs.15 lakh when Pallavi is 18. Also invest in physical gold and sovereign gold bonds for her wedding.
Our assessment
They have invested in safe, but low-return, options that will not be able to beat inflation. Given that the investment horizon is more than 10 years, they should have at least 30-40% of their portfolio in equity-based investments.
She is correct. Physical gold has high making charges as also storage costs. The making charges of coins and bars can be 5-6%, while jewellery items come with a 20-25% mark-up to the gold value. Sovereign gold bonds, on the other hand, offer 2.5% additional interest to the investor and the gains are tax-free if the bonds are held till maturity. “Gold should be a core component of a well-diversified investment portfolio. It serves as a hedge against inflation and economic uncertainties,” says Dinesh Rohira, Founder & CEO, 5nance.
Sukanya builds a big corpus over time
We agree that gold is a hedge against inflation, but that doesn’t make the yellow metal a very good long-term investment. Despite double-digit returns in the past 10 years, gold has not been able to beat the returns from equities (see graphic). It is unlikely to create serious wealth for the investor. This is why financial planners say no more than 10-15% of the investment portfolio should be in gold.
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This story originally appeared on: India Times - Author:Faqs of Insurances
