Ask Mint Money | Combination of term plan and MFs is better than a child plan

I am 42 years old and my net salary is Rs 80,000 per month. My monthly expense is about Rs 30,000 and the rest goes into equated monthly instalment (EMI), premiums and systematic investment plans (SIPs). Average savings per month is Rs 15,000. My goal is to build a corpus for my two-year-old child’s future. The time horizon is 15-20 years. What are child plans? How should I calculate my retirement corpus and what kind of retirement plan should I go for? Also, how do I identify a financial planner to help me?

—Shrikant

The savings rate of Rs 15,000 over Rs 80,000 (18.75%) is good but you can save more. Also you need to calculate your savings correctly. If EMI is towards your car then it is an expense but if it is for payment of house then it is a saving. If you pay premium for an insurance policy and if it is an investment-cum-insurance plan, it logically comes under savings but it does drag down the earnings. If it’s a term plan, it’s meant to ensure the financial plan runs smoothly.

Child plans can be either traditional or similar to unit-linked insurance plans (Ulips). These are wrapped around products where either of the above is covered to showcase the benefits it will accrue. These plans give you funds at periodic intervals and at maturity. And in the event of premature death of the earning parent, they offer these benefits upfront. So payout at regular intervals, at maturity and cover for life in case of untimely death makes it attractive.

However, the insurance cover in these plans is inadequate. Logically, there should be an insurance of 8-10 times of income of the earning member. Also, the returns from traditional plan are quite low and in case of Ulips, the charges are front-ended. You need to continue the policy till maturity to see any benefit. Also, if the scheme does not perform, you don’t have an option to redeem. Hence a better alternative is to consider a combination of term plan and mutual funds.

For retirement planning, you need to start now as this is one of the most expensive needs.

Both the needs you have mentioned are long term and hence you can consider higher equity exposure where you need to be invested for the long term. Pick from asset classes such as large-cap where ICICI Prudential Focused Bluechip and Franklin India Bluechip are good funds. Multi-cap funds have UTI Opportunities and Reliance Equity Opportunity. In the mid-cap space, you can look at IDFC Premier Equity, ICICI Prudential Discovery and lastly hybrid category where HDFC Prudence and HDFC Balanced are good options.

While there is no sure shot way to choose a financial planner, a few aspects which may help you in deciding are qualification, experience and references.

Surya Bhatia is managing partner, Asset Managers.

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