Rising costs of education, financial uncertainty and social pressure can induce anxiety for parents. WIth structured thinking and planning, child investment plans can help you beat the blues and do what’s best for your child.
Parents spend as much time wondering about the happiness of their child as much as fretting about whether they will be financially equipped to meet their needs.
Fortunately, child investment plans as part of your overall financial planning strategy can help you (and your child) get a headstart.
Before you look at child investment plans, ask yourself:
Who is the chief income earner?
This is important because the chief income earner must ensure that the children are marked as nominees on all banking and financial documentation from the moment they are born. In a society such as ours, where the girl child is discriminated against and the boy is seen as the de facto owner of all financial property, this is a safeguard to ensure that in event of an untimely accident, the children you love and care for are protected.
What are the sources of income?
While parents love their children, their capacity to provide for them is shaped by their own realities. For the salaried classes, a stable emergency fund can be a godsend in the event that the primary earner is incapacitated from providing financial support. Business class families (especially small & family owned businesses) face even greater risk due to variability in regular income as well as additional financial risk from taking business loans. In such cases, upon becoming a parent ensure that not all assets are submitted or mortgaged to your business. If they are, pay them off at the earliest so that some assets (like a house ) is always available to the family and children.
Who all understand the family financial structure?
Most houses have a clear demarcation of financial responsibilities just like household chores between the man and the woman. Gendering financial strategy is okay when you are your own but high risk when you have children to take care of together. If you are the primary earner/investor or you outsource your planning to a third party like a fund manager or CA, make sure that your partner / nominated guardian for the child has a clear idea of bank accounts, where to find FD receipts, how to claim life insurance and such decisions. This can be done by maintaining a common family diary or an excel sheet that is only shared with trusted family member.
Are you the parent of a girl child?
As the parent of a young girl, there are several government schemes and the robust Sukanya Samriddhi Yojana available to you. These can help you give your girl child a headstart in life and help you avail several relaxations.
Coincidentally, while there are several schemes that exist, as a parent you may also have more social pressure to skew your girl child’s financial planning towards marriage (such as the custom of buying gold for weddings, while this is a personal choice, ask yourself, if a well-educated, financially independent daughter in the future would need this!)
Let’s dive into some details now, post reflection.
How early should you begin with child investment plans?
While preparing for childbirth is anxiety-inducing (everything from checkups to eating well), the moment you hear the good news is when you should start planning your journey.
Why? Most child specific plans have a lock-in period so that the funds cannot be abused. Hence, starting late, actually delays goals.
Goal based investing
Most parents have an inkling of what they would financially like to support their children on. “I want my child to have the best education” or “I would like to throw a lavish wedding as is expected in my community”.
Child investment plans help to do goal based investing. This is why before you harp on saving all of your money on schooling, college and marriage – ask yourself these pertinent questions:
~ Will these financial decisions hamper overall financial planning for my family on aspects such as taking adequate health insurance coverage, buying a nest egg or planning for a comfortable retirement?
~ Am I making these decisions out of financial prudence or my desire to do everything for my children? This is a sensitive question people refrain from asking themself and their partner. Do you need to save extensively for post graduation when there are attractive loan schemes with long repayment periods available? Do you want to hoard money and jewelry from the beginning when your child may be able to finance their own marriage with their partner? Can jewelry that is heirloom be used instead of sabotaging goals such as education and personal development?
~ What are goals that I need on Day 1 and what are some goals that I may want to course correct on in the upcoming years? While undergraduate education may be a must, you may not want to make assumptions about domestic or foreign education basis your current scenario, and not put an imaginary Harvard or Yale in your dreams (what if your child has a different dream?).
Expense and investment based approach
While brochures for child investment plans may alarm us as much as gossip from our neighbours on donations and costly schooling, these things need to be taken in our stride. For most parents – school fees, apparel, tuitions, books and hobby classes are monthly expenses.
Depending on the nature of these, they can be classified as short term goals and invested in mutual funds for shorter horizons. While the psychological burden of parenting can make one want to buy the most expensive things available – today there are as many free resources to learn as paid ones (think Khan Academy and code.org) – so don’t worry!
Since inflation leads to higher fees and other costs, using any investment instrument that allows you liquidity while beating the inflation rate (such as a hybrid mutual fund) is a good idea when you may need a little more money as opposed to monthly expenses (foreign exchange program for instance).
Ensure an emergency fund
Rajeev* was a finance professional who became a father in 1990. Riding on the wave of promotions, he bought multiple flats in his native town, thinking that they would provide for a stable source of rental income and could be sold in the future for higher education.
Unfortunately with the crash of 2008, he lost a stable source of income with no immediate hiring opportunities in the crash. While his wife continued and supported the family from her income as a teacher – they were unable to take a loan for the medical seat that the daughter had secured. There were no takers for the flat and their daughter had to take a drop year due to no alternate avenues.
Similar to the above case, a parent’s first reaction is to plan for larger financial goals with the good intent of funding aspects such as education that require lakhs of rupees in the long run. The math may not add up, however in the unfortunate event of a pay cut, job loss, or the death of an earning member.
Hence, the foremost priority for a parent should be to hence cover for at least six months of expenses in a savings account or fixed deposit that covers the family and the child’s expenses in case of any short-term crisis.
In the above case, the choice of the asset (being real estate) was a mistake and hence it is important to have diversity (mutual funds, FDs, property).
What is the risk of a crash in your work?
Depending on what you do, you would be aware how risky your job is (for instance a doctor’s income is less likely to be compromised than a BPO professional’s). Ask yourself – what is the risk that you may face by the nature of your job being risky (eg: working in the army), the nature of your industry being unstable (eg: working in an e-commerce startup) and the chances of you financially stagnating (eg: a government employee whose salary is not determined by performance but by the pay commission).
If you are in an industry threatened by the pandemic or likely to suffer the repercussions of the massive degrowth in GDP, it is best to keep a nest egg ready so that your financial situation is not compromised. By nest egg, I don’t mean keeping cash under the mattress, but a few FDs or easily encashable deposits with a large & trustworthy bank.
Insurance – know which to buy
While this article is about child investment plans, it would be missing a limb if it did not speak of insurance. Insurance mis-selling is a rife problem in our country due to poor financial education. Hence uncles and aunties will try to monger fear in a parent’s heart and try to pass off poor financial investment plans that are insurance-investment hybrids with very poor rate of return.
Here is a good comparative chart that looks at the pros and cons of a goverment scheme versus independent mutual fund. Remember, there is no one right answer. It depends on your financial understanding and risk-taking capability.
To be safe , take a basic term plan only in the name of the earning member of the family covering 20X of annual income that can take care of all the needs of the child.
While your child must be covered in your health plan (whether you have a personal mediclaim or one provided by your comapny), taking random insurance linked policies for your child is an easily avoidable financial trap. In the Indian scenario, uncles and aunties often double up as LIC advisors and force poor plans on you. Avoid these and head straight to the insurance website and take a term plan directly.
Here is a comparison chart that can help you decide how much money you should insure for the well-being of your family and children if you are the earning member and in the event of an unfortunate accident.
Choosing the right child investment plans
If you have made it so far, I am sure that your final question is where do I put my money in? Personal finance is ‘personal’ and hence the type of instruments you choose to put your money in should be your personal choice. These are some options:
Recurring or Fixed Deposits/ Debt Funds for short term needs. Suppose your child needs an annual fee for their cricket academy every year. You can put these away in a shorter duration fund either via a monthly SIP or through a recurring deduction from your savings account. Compare different FD rates here or learn about debt funds
PPF: Public Provident Fund is one of the best instruments for your child. It has a lock-in period of 15 years so best to start immediately upon a child’s birth. PPF is also tax exempt and deductible under section 80C of the old tax regime. At the current rate of interest, if you max out your PPF for 150,000 – your child will have a corpus of 40,00,000 right after school. Here is a detailed note on PPF.
Sukanya Samridhi Yojana (SSY): SSY is an investment tool for a girl child under 10 years. It generates fixed returns (currently at 8.50% p.a. higher than other debt instruments like PPF) on the deposit every year. The minimum deposit amount is only Rs. 250 and the maximum amount is Rs. 150,000. SSY must be begun after the child’s birth as it has a lock-in period of 21 years, and hence is suitable for ambitious needs such as post graduation, starting a business, or having a lifelong emergency fund for the girl child. This is the government’s own page detailing the scheme.
Direct Equity/ Equity Mutual Funds: If you are confident and curious, do not feel shy about using equity in the long run objectives for your child’s future (15-21 year long horizon goals). This is the best way to beat inflation. However you need to be adequately informed about this. Do read from resources like Varsity by Zerodha or Valueresearch.
Avoid investing in instruments you don’t understand (such as complex hybrid insurance investment yojanas) or those without credibility (like chit funds).
Parenting can be daunting, but child investment plans can support you on the journey provided you begin early, stay focused and time your entry and exit from instruments correctly. #KhabarLive #hydnews