3 min read.Updated: 14 Nov 2020, 12:02 PM ISTAvneet Kaur
Child insurance policies, where you get fixed payouts after predetermined time period fail to impress most financial planners
These plans sound so complicated
Child-specific insurance plans, child-oriented mutual funds, life insurance plan, mutual funds, fixed deposits and so on.. the list to invest for your child's goals is endless. But, not all child-oriented investment products are efficient in doing their job well, i.e., to provide financial security. To start with, child insurance policies, one of the most popular and highly marketed child-oriented investment options, where you get fixed payouts after predetermined time period to provide for your child' goals, fail to impress most financial planners. You go through their brochure and these plans sound so complicated. After one or two reads, a parent would still be unable to get as to how much payout will s/he actually get and when.
The add ons and other terms and conditions make them even more complex. Once you get a gist of it, you cannot be sure if the payout would be sufficient to fulfill your child's goals.
"Child insurance plans combine investment with insurance to help parents fund their children's life events such as graduation and marriage. However, certain drawbacks make child insurance plans unattractive. The returns earned on these plans are always restricted as only some portion of the premium paid goes towards investments. These plans do not provide flexibility as they come with a fixed tenure," says Archit Gupta, Founder and CEO, ClearTax.
Investment experts instead advise parents to go for simpler investments which are flexible enough to be tweaked as per the child-related goals, which could be dynamic in nature. Also, the investments should be able to generate returns on your money, say mutual fund advisors.
"Mixing investment needs with insurance is a common mistake and a sub-optimal financial decision. A systematic plan by investing a specified amount periodically thoroughly monthly SIPs in a diversified portfolio, along with a separate term insurance plan, will offer much greater benefits than that of a child insurance plans. It offers the flexibility to review, modify and strategically tweak the plans to achieve your child’s future educational goals which could be dynamic in nature," says Tarun Birani Founder and CEO TBNG Capital Advisors.
The sum assured under the term insurance policy should be sufficient to take care of the financial needs of your child and other family members in case of your absence. Never choose a random number. Do your calculations. Also, the policy term should be chosen carefully.
"Decide the tenure of the policy carefully, ensuring that your child gets all the benefits at the right age," says Naval Goel, CEO & Founder of PolicyX.com.
If you start planning early, a child-related goal is a long term goal which provides you with a lot of time to plan and reach your goal comfortably. But you need to be disciplined with your investments during that term. You can choose a diversified equity fund as per your risk appetite.
Industry experts believe while these schemes are positioned as solution-oriented schemes by the definition of Sebi, they do not offer anything special.
"Child-oriented mutual funds do not offer anything special other than the fact they have to be in the minor’s name and have a lock-in of five years, or till the child turns 18. These two features can, to some extent, discourage any impulsive decision to exit a scheme—which is good for any equity-oriented investment," says Prableen Bajpai, founder & managing partner, Finfix Research & Analytics.
Sebi defines a Solution-oriented children's fund as an open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains age of majority, whichever is earlier.
However, these schemes are not a bad investment. A naive investor may go for a child-oriented mutual fund scheme and slowly graduate to other diversified funds.
Best gift for your child this Children's Day
"The best financial gift you could offer your child is a secured financial future and saving systemically for their goals , to ensure he or she is able to face any unforeseen crisis with ease," says Tarun Birani.
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