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Best Investment Plans for Children

July 03 , 2013

What parent is there who does not care about her child's future? Every one does but if you want to ensure there are enough funds in time for your kid's education and marriage you need to sow the seeds of money on good soil where will bring good returns. For learning about basics for investing for your children's needs you may read our article How to Plan Best Investment For Your Child.

Traditional insurance plans, FD, PPF are not good investment options for children

You must get this one right. Irrespective of what the insurance agent told you and contradictory to what TV ads seem to have hammered down people's mind, traditional insurance policies (of LIC or any other insurer) are not the best investment plan for your child.

First of all one must realize that naming insurance plans as XYZ Child Plan is just a marketing gimmick that has worked very well because there is no parent that is not concerned about their child's future. The plan brochure might even read 'this plan is specially designed for education and future needs of children' and so on but in reality they are in no way different from the regular policies. Children investment plans are not different from the usual investment plans unlike the case is in baby food, baby powder and such consumption products which are specifically designed for them.

The yields of child insurance plans, fixed deposit, PPF and such debt plans usually do not even catch up with inflation. You can check this up for yourself. In general, any investment product that fixes a rate of return in advance is incapable of beating inflation.

It is true that insurance plans and PPF do offer tax relief, ensure discipline through fixed maturity and lock-in period but it is foolish to compromise on the returns for tax benefit or discipline. Traditional child plans from insurance companies have very high charges disguised under different names.

Some might argue that child insurance plans have an insurance component which is beneficial. But insurance component in traditional policies is minimal and this is an expensive way to take insurance. Earning parents should rather look at term policy for adequate insurance cover.

ULIPs are also ruled out as the best investment option for children because they are also very high on charges and their investment is not transparent.

Equity mutual funds - best investment option for your child

Based on the four parameters discussed in the article mentioned at the start, equity mutual funds qualify well as the best investment option for children's future goals.

  • Mutual funds are managed by experienced professionals and if you pick a good diversified equity fund you can rest assured that your investment would yield good returns over time.
  • Long term capital gains tax on equity mutual funds is nil.
  • You can start a Systematic Investment Plan (SIP) in the desired fund and money would be transferred from your bank account to the fund every month, or as you specify. They do not have fixed maturity period or lock-in period. You would have to keep the discipline of not diverting the funds for other use.
  • Equity mutual funds charge between 2.5-3% a year as expense ratio. This is low compared to other options like ULIPs and traditional insurance policies.

Choosing best mutual fund for child investment

Again one can mistakenly assume that mutual funds with 'Child' or 'Kid' in the name are really great funds which will help them achieve desired returns. Rather just follow the simple thumb rule we recommend always:

For long term investments (goals at least 5 years away) pick up 1 good diversified equity mutual fund.

Picking up the best fund is not hard. You can refer to our recommendations in http://www.mutualfunds.fintotal.com/Recommendations/1 and start a monthly SIP in it till your goal is near. Just keep a tab on the fund once a year to see it is still among the best funds. When your goal is close, say, just 3 months away, start moving accumulated corpus from the equity fund to a debt/liquid oriented fund using SWP option.

If you follow these steps diligently, without reacting to market movements, you will reach you goal with a bang. It is good to take personal advice from experts and you can confirm your choice with your financial advisor; only ensure you consult an advisor, and not an agent or distributor so there are no conflicting interests.


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