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Saving for your kids is mostly dictated by fear and emotions. The fear of dying before the kids are able to fend for themselves drives a lot of parents to buying multiple insurance policies that are often investment oriented, whereas for some, the assurance of returns keeps them tightly hooked on to fixed-income products. These strategies may give you peace of mind, but both are flawed. In fact, the list of mistakes doesn’t stop with these. We spoke to financial planners to point out some popular and oft repeated mistakes that people make. Read on to understand, recognize and avoid them.

Just as you make adjustments in other aspects of your life in preparation of welcoming a baby, you need to do the same with money as well. In other words, include investment goals for kids in your larger scheme of financial planning. In fact, that’s the first thing a financial adviser would suggest and that’s the first mistake you make. “I typically find parents thinking about financial planning for their kids when the kids are in, say, class 9. That leaves very little time for investing sensibly, and needless to say, you need to save more to make up for lost time, which could disturb cash flows," said Lalitha Jayabalan, a Chennai-based financial planner at MoneyVedam. Here is an example of what Jayabalan is saying. Assuming the rate of return on a product remains fixed at 8% with a time horizon of 15 years, an investment of 1 lakh would become 3.17 lakh. But if you started, say, 10 years later, or with a time horizon of just 5 years, then 1 lakh at 8% would become just 1.47 lakh, and to get 3.17 lakh in 5 years, you will need to invest almost double the amount. “It’s always a good idea to start early so that you can have a proper asset allocation and can catch at least one cycle in the stock market," added Jayabalan.

Again a common mistake: parents look at current costs to decide financial goals. So, if a management degree currently costs around 30 lakh, parents will typically start working towards a goal of 30 lakh and this is a mistake. “Parents primarily plan for higher education and they look at its value today instead of looking at the future value. That is a mistake because when you factor in inflation, the value of a future goal will be much higher, especially in the case of education, as inflation in education is about 2 percentage points higher than general inflation," said Ankur Kapur, director-investment advisory at www.finqa.in, a financial solutions portal. This means that if a management degree, say, at a premier college such as the Indian School of Business costs around 34 lakh now, then at 8% inflation, it will cost around 73.4 lakh in 10 years, and that’s the target you need to aim at.

Buying insurance is more of an emotional decision for many parents. The fear of crippling your loved ones, especially your children, due to an untimely death is a horrific thought, and therefore, many draw comfort in insurance, but that’s not the mistake. The mistake is in the type of insurance that people take. “Most people end up taking investment policies, which basically means that they end up with very little insurance and costly investment. Despite having so many insurance policies, I see that people are under-insured and that’s primarily because they pick up investment-oriented policies," said Nitin B. Vyakaranam, founder and chief executive officer, Artha Yantra, an online goal-based financial adviser.

“It’s important to be adequately insured and the best way of doing that is through a term plan," added Vyakaranam. Insurance plans that are tailor-made for children come with attractive packaging.

A typical insurance plan tailor-made for children offers insurance benefits immediately on death of the policyholder, and subsequently it waives off future premiums and pays them on behalf of the policyholder. On maturity, the beneficiary gets the maturity corpus thereby ensuring that the beneficiary has some money on death of the policyholder and, as planned, on maturity as well. While the concept may be great it doesn’t usually fly with financial planners.

“Insurance policies tend to give you benefits in absolute amount, which gives no sense of the returns from the policy. They suffer from lack of transparency and clarity. They should either disclose the return or speak about absolute benefits in present value terms," said Jayabalan. While Jayabalan is referring to traditional plans, even unit-linked insurance plans, which have improved, can be tricky considering the insurance element is not portable. Unless you are absolutely sure about the time horizon and the plan, keep your insurance and investment needs separate. “By buying a decent cover and investing separately, you can mimic the structure of insurance plans for kids," said Vyakaranam.

Staying on the subject of insurance, there is one other policy you must have—health insurance. Health insurance for kids is typically bought along with the parents as a floater policy. A floater policy considers the entire family as one unit. So, if one member uses the cover, the insurance reduces by that much in that year for subsequent claims on all members. Given the structure of a floater policy and soaring medical costs, it’s important that you have adequate health insurance. Typically, for a family of four, a cover of at least 7-10 lakh is recommended.

This is a mistake related to starting late. When you crunch the time to achieve your goals, you typically get overcautious and end up with a debt-laden portfolio. This strategy can be counterproductive. But when you start early, you get time to focus clearly on your asset allocation and choose the right products. “Many parents are overcautious and as a result end up investing in fixed deposits. It’s important to understand the purpose and time horizons of products. For a long-term horizon, a kicker of equity is essential, but if your horizon is short, of, say, three years or less, you can choose from fixed deposits, arbitrage funds and bond funds," said Kapur.

Overexposure to real estate is also a problem. “Many people find comfort in buying real estate for their kids, but they overdo it. It’s important to understand that realty is illiquid, and that you need a diversified portfolio," said Jayabalan.

If you are guilty of committing all of the above mistakes, then there is a very good chance you will be forced to dip into other targeted investments such as retirement money to make up for your mistakes. “Parents are emotional and tend to forsake their goals for their kids. As a result, they end up depending on their children during retirement days. They need to clearly demarcate goals, and if they plan in advance, they can achieve all of their targets with minimum disruption," said Kapur.

Just putting away some money is not enough when it comes to planning for children; you need to be meticulous, too. A good way to do that is by treating saving for your children as another important financial goal, in addition to the others.

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