Children may be sweet as honey, but bringing them up sure needs a lot of money. Education, extra-curricular activities, family trips, toys, clothing — all these may punch a hole in your monthly budget. There are also the long-term goals such as higher education or wedding expenses. But if you start early on financial planning for your children, you can build up a corpus to stand you in good stead through thick and thin.
Mutual funds
Equity investments are a good way to build a corpus to meet your child’s long-term goals. Hybrid mutual fund schemes (balanced funds) offering the safety of fixed income instruments and the upside of equities may be an ideal option to maximise returns without taking excessive risk.
Fund houses such as Axis Mutual Fund, HDFC Mutual Fund and ICICI Mutual Fund offer balanced schemes specially designed for children, these are also options you can consider.
So how are these children’s schemes different from other regular balanced schemes? For one, investment in these schemes can be made only in the name of minor children. These schemes also offer personal accident cover to the guardian/parent.
There is also a lock-in option to deter premature withdrawal and ensure that the corpus is used to meet the intended life goal. For instance, when you invest in Axis Children’s Gift Fund, you have the option of locking in your investment in the scheme until your child turns 18 years or three years from the date of allotment, whichever is later.
You can choose not to lock-in the investment, but redemption within three years will attract an exit load. For instance, withdrawal from Axis Children’s Fund within one year, two years and before three years has exit load of 3 per cent, 2 per cent and 1 per cent, respectively. The fund has delivered return of about 8 per cent since its inception in December 2015, largely in line with its equity benchmark NIFTY 50. This is good performance, given the fund’s mandate requires it to hold at least a fourth of its assets in fixed income securities.
Other children-focused schemes such as HDFC Children’s Gift Fund and ICICI Prudential Child Care fund also have a similar exit load structure.
HDFC Mutual Fund offers two schemes — HDFC Children’s Gift Fund - Saving Plan and HDFC Children’s Gift Fund - Investment Plan. Under the Saving Plan, the idea is to reduce volatility. The fund will have at least 80 per cent of its assets invested in less volatile debt instruments; this can go up to 100 per cent should the market turn volatile. Since inception in March 2001, the fund has delivered over 11 per cent annually. The scheme also offers personal accident cover to the guardian until the child completes 18 years of age or the policy is redeemed, whichever is earlier. The maximum sum insured is the lower of 10 times the cost value of units or ₹10 lakh.
In contrast, the Investment Plan has a higher equity slant — up to 75 of its total assets are invested in equity instruments. Should the markets turn volatile, the fund can invest up to 60 per cent in debt instruments. The Investment plan is graded as moderately high risk scheme while the Saving Plan, which has a higher debt skew, carries moderate risk. The investment plan has delivered 17 per cent annualised returns since its inception in March 2001.
ICICI Mutual Fund also has two schemes — ICICI Prudential Child Care - Gift Plan and ICICI Prudential Child Care - Study Plan. The Gift Plan invests between 65 and 100 per cent in equities; this may be suitable for those who are looking at a longer investment horizon (say, child’s age is less than 13 years) and are willing to take higher equity exposure.
In contrast, if your child is, say, between 13 and 17 years of age and if your risk appetite is low, the Study Plan (which invests 75-100 per cent of the assets in fixed income instruments) may be a better option.
The annualised returns since inception for ICICI Prudential Child Care - Gift Plan and Study Plan were over 17 per cent and about 13 per cent, respectively. Both these schemes also offer personal accident cover — the maximum sum insured is the lower of 10 times the cost value of units or ₹5 lakh. The cover is valid until the child completes 18 years or the units are redeemed, whichever is earlier.
There is no tax liability if you hold plans that invest at least 65 per cent in equities for at least one year. For debt schemes, any profit on redemption done within three years from the date of purchase is taxable at their respective slab rate. Those redeemed after three years are taxable at 20 per cent after availing indexation benefit; for NRIs the rate is 10 per cent before indexation.
Saving products
Many banks offer different fixed deposit, recurring deposit and savings accounts in the name of children. Typically the savings accounts for children are aimed at inculcating the habit of saving and returns are not material here. They usually have small or nil minimum balance requirements and children above 10 years of age may be given their own debit card to operate.
Recurring deposit scheme for kids can be an option for those who want to minimise risk. These are taken in the minor child’s name and have long tenures of up to 10 years. Regular savings can add up due to the power of compounding. For instance, saving ₹1,380 per month for five years will give you a maturity value of ₹1 lakh, with a cumulative interest rate of about 7.5 per cent.
Also, another benefit of these RDs is that those enrolled in the scheme may be given priority in obtaining education loan from the bank — a useful feature for parents saving for their children’s higher education costs. That said, the tax adjusted returns of these deposits would be lower, based on your tax bracket.
The RD from Tamilnad Mercantile Bank, for example, offers tenures of one to ten years and minimum target sum is ₹10,000. The interest rate varies from 5.8 per cent to 7.8 per cent, based on the tenure.
ICICI Bank’s Child Education Plan has tenures of four years to 10 years. Of this, investments must be made for a minimum of three years. Interest is earned during the investment phase and payouts happen on a quarterly or annual basis. You can avail loan on deposits; premature closure and partial withdrawals are also allowed. Interest rate varies from 7.25 per cent to up to 7.5 per cent for deposit amounts under ₹1 crore (7.35 per cent to up to 7.6 per cent for amounts over ₹1 crore).
If you have a girl child under the age of 10, Sukanya Samriddhi Scheme may be a good one to consider. Despite cuts over the past year, the scheme’s interest rate at 8.5 per cent currently remains healthy. The investment is eligible for tax deduction under Section 80C and the interest earned on the account and the maturity amount are exempt from tax.
The account must be opened in the name of the girl child who is less than 10 years old. Deposits are allowed for up to 15 years from the account opening. The account will mature on 21 years from the date of opening. When the girl child gets married after she is 18, the account can be closed at the request of the account holder.
You cannot take loans against the amount in this scheme. Partial withdrawals are allowed after the child turns 18 or has passed 10th standard whichever is earlier; 50 per cent of the amount balance (at the end of the preceding financial year) can be withdrawn to fund her higher education.
Insurance
Conventional wisdom advises that one must separate investment and insurance goals. But when it comes to insurance plans for your children, the logic may not apply completely.
Child insurance plans basically serve two purposes; One, to make available funds to meet milestones such as higher education and marriage. Two, to insulate the child in the event of untimely death of parents.
Say, the earning parent takes a term cover or life cover. In case of an eventuality, this will provide the child/family a lumpsum. But unless it is invested intelligently, meeting critical life goals may be a challenge. Childcare policies targeting specific milestones such as higher studies and marriage, on the other hand, ensure that money is available to the child at the appropriate time. For instance, consider Aviva Young Scholar Advantage Policy. The Unit Linked Insurance Policy (ULIP) scheme provides the sum assured to meet the family’s immediate needs; the premium for the remaining period is waived; and the fund is paid to the child at the end of the policy term. The minimum sum assured is the higher of 10 times annual premium or half the annual premium multiplied by the policy tenure. Besides this, the insurance premium is also considered for tax exemption under Section 80C.
Some policies also offer additional riders, where the family will receive payout from the insurer on a regular basis on death of the insured. For instance, LIC Child Plan has a rider which allows annual payment of 10 per cent of the sum assured for the child’s education spend.
While the returns from these schemes may not be attractive, they score over the term plan plus equity investment option on two counts. One, the benefit in this case is payable only at the end of the term and directly to the child, whereas in case of term or life cover the benefits are paid either to the surviving partner or the guardian, in case both parents die when the child is still a minor. Two, the payouts happen only on maturity which is largely aligned with the life goal. For instance, if you take an education plan which is slated to mature when the child turns 18, even in the event of an eventuality in the interim period, the final payout will happen only after the child completes 18 years to ensure that the corpus is used for the intended milestone.
(The article was first published in Business Line.)