As a parent you want to ensure that your children are not left behind in the rat race. You want your children to be able to achieve their dreams—education, career, even marriage. Life insurance and mutual fund companies understand only too well because, for them, your parental ambitions mean business and profits.
During the past decade, financial institutions have fully realized the enormous benefits of advertising products which are specifically targeted at children and would emotionally appeal to parents. Amit Jain, a 29-year-old New Delhi-based doctor, says, “When I watch ads of ICICI Prudential Life’s SmartKid, Birla Sun Life’s Children’s Dream Plan and HDFC Standard Life’s Young Star Plus, I, too, feel the need to buy a policy for my two-year-old son.”
Consider this. The Insurance Regulatory and Development Authority’s 2005-06 annual report stated that the insurance premium collections in April-September 2006 grew 162% year-on-year to Rs29,664.60 crore. Insurance company officials say 20-30% of their business comes from children-specific insurance policies alone. Insurance policies are not the only financial products that are wooing parents; mutual funds companies are not too far behind.
Funds of Indian asset management firms have grown from Rs2.31 trillion to Rs3.28 trillion during the last fiscal and were pegged at Rs4 trillion by 30 June. Although mutual funds grew by 42% over a one-year period, children-specific mutual funds (CSMFs) are not a major chunk of the managed assets pie. CSMFs comprise only about 2% market share.
Mutual Interest (Graphic)
Policy Fine Print (Graphic)
Are children-specific insurance products really different from other regular products sold by insurance companies? Or is it the proverbial case of old wine in a new bottle? The insurance industry seems to be divided on the issue.
Children-specific financial products are designed to cash in on the emotion of parents, says Gaurav Mashruwala, a Mumbai-based financial planner. “I never recommend these products to my clients,” he says. “These products tend to have high costs compared with the regular ones. Moreover, these are not much different from the other insurance and mutual fund products.”
Anil Chopra, director of Bajaj Allianz, a New Delhi-based financial services provider, disagrees. “Although these products may be emotionally manipulative, they help you in making goal-oriented investments,” Chopra says. “We always recommend these products to our clients who want to make need-based investments for their children.”
“Insurance policies are also used as investment tools,” says Pranav Mishra, senior vice-president, ICICI Prudential Life Insurance. “These are designed to provide your family financial security when you are not there to support them monetarily. If you outlive the policy, you get your premiums back along with bonus or market-related returns on it.”
Children’s insurance policies also work pretty much the same way. They promise financial security to minors in case of a major unfortunate life event involving a parent or a caregiver. Most of these plans can be customized to suit the specific needs of a child such as education, marriage or even setting up a business when he/she grows up.
These insurance plans come in two broad variants—regular endowment plans and unit- linked insurance plans (Ulips). Endowment plans invest for the most part in debt instruments such as corporate bonds and government securities. They offer a lump sum on maturity as opposed to a regular payout in money-back policies, which are variants of endowment policies that are designed to fund a child’s education on an ongoing basis. These policies disburse money at regular intervals. A Ulip can invest across equity and debt market in varying proportions.
Unlike insurance policies, mutual funds are a pure investment tool. Mutual funds are managed funds where a fund manager pools money from a bunch of people and makes investments on their behalf in the stock market. CSMFs usually invest in a mix of equity and debt instruments.
Among the more than 700 mutual fund schemes in the market today, there are 14 schemes that specifically target children. Of these 14 CSMF schemes, only four are hybrid equity-based schemes, while the rest are hybrid debt-based schemes.
“Children’s mutual funds are still not very popular because of poor marketing,” says Srinivasan Jain, chief marketing officer, SBI Magnum Mutual Fund. “We are planning to reposition the Magnum Children’s Benefit Plan strategically and market it aggressively.”
So, before you decide to go in for an impulse buy and get seduced by an attractive children’s financial product, understand what the costs are and how it will help your child prosper and grow.
Here is a low-down on the financial products for children in the market
Children’s Ulips are unique because of their double benefit nature. Under these plans, on the death of the life assured before maturity, the sum assured is paid, future premiums are waived, and the policy continues till maturity—commonly known as the waiver-of-premium option.
The subscriber pays an extra premium for availing of this inbuilt waiver-of-premium option in the insurance policy, but this rider makes the policies a little costlier than regular ones. Children-specific Ulips, which invest in stock markets, have an average allocation charge of 20-30% of the annual premium for the first two years.
From the little extra money paid by you for the waiver-of-premium option, the insurance company buys a term insurance in your name. In case of term insurance, all premiums paid are used to cover the cost of insurance protection with a no money-back option and if you don’t survive the policy, the company gets a sum assured on your term insurance, which it uses to pay your remaining dues.
Performance of insurance policies depends on its funds’ performance. All insurance policies give you a range of options such as liquid fund, defensive fund, equity fund and balanced fund to choose from to fit your risk-taking profile.
These policies are generally in the name of the parents, but there are a few policies, such as Jeevan Kishore, Komal Jeevan of Life Insurance Corp., that are signed on the child’s name. These policies don’t pay out in case of any eventuality to the parent, but because it is in the child’s name, the parents get a sum assured in case any unfortunate life event befalls the child.
Most of these policies, which have the child as a life assured, are endowment policies and generally have high charges in comparison with Ulips. Mortality rates are high among Indian children, so these policies can be expensive to maintain. Nearly 21.8 lakh children under five years die annually in India, according to a report from Unicef.
A life insurance subscriber can customize his own product by buying a term insurance policy. It’s a good idea to buy a cheap term policy and invest the rest in a mutual fund.
Children-specific mutual funds are expensive. Of the top five hybrid debt-oriented schemes, in terms of annual expenses, three are children’s products. Tata Young Citizen’s Fund has an expense ratio of 2.32%, LICMF Children’s Fund, of 2.27%, and HDFC Children’s Gift Fund, of 2.25%. Canbalance from Canbank, the top-performing hybrid debt-oriented scheme, has an expense ratio as low as 0.87%.
These policies also have a high exit load—charges levied when exiting the fund, meant to discourage frequent withdrawals. These are 3-1% of the fund value for redemption within 365 days—significant considering there is no exit load in other hybrid schemes.
CSMFs offer the same features as their corresponding category products, though they are not alike in performance. Over the period of one year, while hybrid debt-oriented schemes have managed to give 17% returns, children-specific funds have only given an average return of 14%.
In contrast to hybrid debt-oriented schemes, equity-oriented schemes have given average returns of 45% against the category average of 39% over a one-year period.
HDFC Children’s Gift Sav yielded the lowest return of 9% last year. However, three schemes, Tata Young Citizen’s Fund, Principal Child Benefit Fund and Magnum Children’s Benefit Plan schemes, have given more than the category average.
CSMFs don’t look to be a very popular investment option, given their small average asset size of Rs74 crore. The only exception to this is the UTI CCP Balanced Fund, which has an asset size of Rs2,595 crore. UTI CCP Balanced was earlier called the UTI Children’s Gift Fund, before it was disbanded. The mutual fund offered guaranteed returns of 9%.
Equities are said to yield better returns as market fluctuations tend to even out in the long run. Therefore, investing in equity-diversified schemes can give you better returns than hybrid equity- or debt-oriented schemes. Many of these schemes also give you add-ons such as personal accident policy and scholarship riders, which are meant to lure parents as separate stand-alone insurance products.
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