Piggy banks are an inseparable part of most people’s childhood memories. They serve as tools for parents to instill the discipline of saving in children. Breaking open a piggy bank once it is full helps us realize the benefits of saving. While piggy banks are still around, it’s advisable to expose your children to banking products at an early stage. Most banks in India offer products specific to children.
The habit of saving forms the backbone of the wealth creation cycle. “It’s implied that you need to save; if you can’t, you will not be able to create wealth,” says Satya Narayan Bansal, chief executive (India), Barclays Wealth.
Bundle of joy
Your bundle of joy means new responsibilities for you. So, it’s best to get your money needs sorted right after your child is born. Relatives and friends invariably bring gifts for the newborn, including cash, mutual funds or even insurance policies. It’s best to make use of these gifts. Continue the mutual funds or life insurance policies, and park the cash in a bank. Says Gaurav Mashruwala, a Mumbai-based certified financial planner (CFP): “I opened a bank account for my daughter when she was just 12 days old. I did it as a good parent and even more as a financial planner.”
The first step to start saving for your newborn should be to open a savings account or a recurring account to park savings and cash gifts.
Several banks offer savings accounts exclusively for children. For example, Andhra Bank’s Kiddy Bank Account is meant for children up to 18 years. If your child is below 10, you become the natural guardian and can open and operate an account in his name. The minimum balance to be maintained in the account is Rs100. The account also has the option of an accident insurance cover for the child and parent from United India Insurance for an assured sum of Rs1 lakh, at a premium of just Rs55.
ICICI Bank offers banking services for children, from those just a day old to the age of 18. However, the parents need to have an account with the bank to open one for their child. The minimum average balance requirement is Rs2,500.
At this stage, you can also look at public provident funds (PPFs) and open an account in your bank. Ramganesh Iyer, CFP, Park Financial Advisors, says, “It’s wise to open a PPF account in the child’s name till he is three years old.”
Your kids and expenses grow together. Admission to a playschool, or even a nursery, could cost you a good sum. Once your child is ready to go to school, you will need a lump sum for admission fees. To meet the expenses, it could be a good idea to make a fixed deposit (FD) that would mature around that time. However, to get the best returns, ensure that you also buy investment products whose returns can beat inflation. FDs provide safety to your portfolio in case the equity investments go awry. Says Iyer: “An FD isn’t a great investment tool for kids. It is not tax-efficient, its interest part is taxable and it fails to beat inflation. Recurring deposits are worse as they give lower returns.”
Your investment horizon should ideally be 21 years. For maximum returns, allocate 80% of your portfolio to equity and 20% to debt products when the child is younger. Says Iyer: “When your child reaches the age of 15 or 16, it’s better to shift from equity to debt as a lump sum may be needed for higher education soon after. FDs make sense at this juncture.”
When your child is mature enough, link his pocket money to a savings bank account. Though it will earn you a measly interest of 3.5% per annum, it will help your child save to earn interest and understand how banking products work. Many banks offer facilities such as personalized chequebooks, international debit cards for children above seven years with a daily withdrawal/spending limit of Rs1,000- 2,500, and ATM and Internet banking facilities with separate logins for children. ICICI Bank, HDFC Bank and Axis Bank are among the banks that offer these facilities. Check individual bank websites for further details.
“A bank account makes kids aware of the banking system and its nuances early in their lives,” says Bansal.
How much is enough? Though kids get access to debit cards at the age of seven, “it’s best to expose your child to a card only after 10 years of age”, says Iyer. Before doing so, explain how a debit card works. The concept of credit, too, needs to be explained. But giving a credit card to a 10-year-old would not be wise.
It’s good to expose the child to the latest technology and payment modes, such as mobile banking. However, ensure that you monitor his expenses. A predetermined spending limit would ensure that the child does not go overboard.
The Reserve Bank of India (RBI) has a programme called Financial Education Initiative for children (www.rbi.org.in/financialeducation). The site explains banking basics in a story format. It has films and money games that will help your child understand the concept of money management and banking.
Setting the right environment is the key to inculcating financial prudence among children. According to Bansal, if you want your child to save, you will need to do the same. If you talk about saving and indulge in luxury shopping, your child could get the wrong signals.
WHAT TO DO
• Open a separate savings account/recurring deposit for your child
• Deposit the cash gifts he gets in the account
• Put the money into a fixed deposit when the amount becomes sizeable
• When the child is around 10 years, give him a debit card with caps
• Expose your child to educational resources about banking
The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.
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If you are planning to buy life insurance for your child, keep these things in mind:
• Consider the child endowment plan if your risk profile is low and you want the plan to mature at 10 years. Downside: low returns
• Buy a unit-linked insurance plan (Ulip)for the child if your risk profile is moderate to high and you can remain invested for more than 10 years. Downside: high volatility
• Use the 15-day ‘free look’ period
• Invest in the all-equity fund option in child Ulips
• Opt for Ulip withdrawals to meet the child’s education needs only after 10 years
• De-risk Ulip by shifting funds from all-equity to safer funds when three years away from maturity.
If you need money urgently, borrow against gold to keep interest rates reasonable:
Eligibility:Anyone between 18 and 75 years of age, resident in the bank’s branch area (should have been staying at the current residence for at least six months)
Interest: 9.5-13.75% (fixed or floating)
Collateral: Jewellery, bars, or gold ETFs (exchange traded funds)
Amount: Rs5,000 to Rs15 lakh
Tenure: A few weeks to two or more years (varies from bank to bank)
Availability: Easier than a personal loan. Disbursement may be as fast as 30 minutes. Identity, address proof and three passport-size photographs needed
Penalty:Collateral is usually seized after a 90-day grace period if loan has not been repaid. Bindisha Sarang
The best time to start investment planning for your child is as soon as he is born! A Public Provident Fund (PPF) account is a risk-free option for your child’s financial future, so open a PPF account before your child is two years old:
• Start with any gifts of cash your child has received. Later, you can add a part of your own income
• Make no partial withdrawals.
• On maturity (after 15 years), extend the account term by another five years if you can
• If you need to withdraw at the end of 15 years, park the maturity proceeds in debt instruments. Deepti Bhaskaran
For studies in India, loans up to Rs10 lakh are available; for studies abroad, the figure goes up to Rs20 lakh. Collateral is needed for Rs4-7.5 lakh, tangible collateral for loans above Rs7.5 lakh. Bank of Baroda also gives loans for school education. Simple interest is charged from the day the loan starts to the end of the moratorium period in most cases. When repayment of principal starts, compound interest is charged on the reducing balance. Education loans don’t have a prepayment penalty. Most banks offer a concession of 0.5-1% on loans for girls. Tax deduction is available on loans for higher education under section 80E, for eight years. Anagh Pal, with Harsh Roongta, CEO, Apnaloan, and Swami Saran Sharma.