The biggest concern or confusion for many of the parents is to identify the best child saving and investment plan in India. There are Endowment Plans, ULIPs, or Mutual Funds, which claim they are best. However, which is really best?
I am writing this post with intention of avoiding the biggest misconception with respect to child saving and investment. I am going to share you how you can design the Best child saving and investment plan in India by following the below steps.
This plan will not recommend you any Endowment Plans, ULIPs or Mutual Funds meant and SOLD as BEST CHILD PLAN products. However, makes you understand the risk involved in such products and how can you design your own plan and start investing.
Here are the steps, which makes you easy choosing the Best child saving and investment plan in India.
First thing, you have to make sure is to completely NEGLECT these instruments, which claim to be meant for CHILD EDUCATION AND MARRIAGE.
The only features which make you attract with such plans are PREMIUM WAIVER BENEFITS in case of the death of the parent. However, it does not mean that one must buy such products because of this. You can compensate such feature by buying the simple term life insurance.
My reasons for avoiding such products are-Liquidity Issue, no past track record of such products, may not be able to beat the future cost of your kids, and complication in design.
In my first point, I guided you to stay away from an endowment, ULIPs, or Mutual Funds, which are meant for kids. However, it does not mean that you must ignore life insurance.
Hence, you must have adequate life insurance coverage. How much you need depends on identifying the below points.
# Sum up all your future Household expenses and child’s yearly school and tuition fee from today to till child reach the age of college.
# Current value of child’s Graduation and Post Graduation expenses.
Once, you sum up these, and then the required life insurance coverage is what you have to buy. Do remember that this Life Insurance coverage calculation is only for your child education planning. However, if you have any other financial goals, such goals, and liabilities must also be included while arriving at final life insurance requirement.
Also, the above said points to arrive at is a simple step. If you need specific requirement of how much you need, then take the help of a fee-only planner or do it yourself.
Refer:-Top 5 Best Online Term Insurance Plans in India in 2017
Many may be in a dilemma of when to start investing for your child saving and investment. Is it immediately after the birth of the kid or when? In my view, the BEST TIME TO INVEST IS NOW. Because those who thought of investing now after a gap of few years are in hurry to accumulate. But thinking of when makes many to postpone also.
Hence, whether your kid born today or he/she is 5 yrs old, the right to start investing is NOW.
Once the basic actions of avoiding the junk products, buying proper life insurance and decided the mindset of start investing now, the next step is to identify the quantum and time horizon of the goal.
You can discuss the same with the parents who have kids and they are doing the graduation and post graduation currently. Based on that, you must consider the CURRENT cost of such expenses.
Once this is done, then identify the time horizon. Means how many years left for your child’s graduation and post graduation. This is the time horizon within which you have to accumulate.
Regarding the marriage goal, it depends on society to society. Hence, instead of relying on some other sources, it is always best to identify the marriage cost in our society in today’s term. Also, when you are planning to marry your child.
Remember one thing that you can’t postpone your child graduation and post graduation. Hence, they are specific in nature. However, same may not be true with marriage. It may be preponed or postponed also.
Ideally, many consider the inflation rate of 6% to 7%. However, if you look at the way education cost going up, I would rather consider the inflation rate of around 8% to 10%.
You notice one thing, for higher education the fees may not be increased on yearly basis. But suddenly they increase it after 3-4 years with an exorbitant rate. Hence, it is prudent to consider the higher inflation rate than the typical 5% or 6%.
Once you know the time horizon, the current cost of graduation or post graduation and the inflation rate, the next step is to identify the asset class and the approximate return expectation.
I would suggest that you must ideally keep around 7% returns for debt and 10% to 12% from equity. However, if your products generated more than these expectations, then you may reach the goals earlier and feel that this like BONUS!
Hence, set an idealistic return on investment expectation.
Now you are fully aware of the time horizon of the goal, the current cost of the goal, inflation and return expectation from each asset class. The next step is to select an appropriate product for investing.
# Debt-In case of debt, I would suggest PPF (if time horizon matching the maturity period of the product), Ultra Short Term Debt Funds or Short Term Gilt Funds (Top and Best Debt Mutual Funds in India for 2017).
# Equity-You have to choose one Large Cap, one Mid-cap, and one Small-cap Mutual Funds. Three funds enough to manage your equity portfolio (Refer Top 10 Best SIP Mutual Funds to invest in India in 2017)..
However, if you do not want to separate equity and debt in a different product, then chose equity-oriented balanced funds also. In such funds, the ratio between equity and debt usually is around 65:35. However, do remember to verify the quality of debt portfolio the fund holding and the market cap of an equity portfolio.
Because ALL EQUITY ORIENTED BALANCED FUNDS ARE NOT SAME.
The next step is identifying the asset allocation between debt and equity. There is no such standard rule. However, I am recommending the below rule to follow.
If the goal is below 5 years-Do not touch equity product. Use the debt products of your choice like FDs, RDs or Debt Funds.
If the goal is 5 years to 10 years-Allocate debt:equity in the ratio of 40:60.
If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70.
Also, keep in mind that once the goal is about to near, you have to reduce your equity portfolio and increase the debt portfolio while doing the review.
Once the investment is started based on the above procedure, the next step is to SIT SILENTLY FOR 2-3 years. After that, start reviewing your portfolio once in a year.
Bring back the asset allocation to the standard of which I shared above. Even though you may not feel the importance of this activity, but it will definitely give you an edge during the equity market downfall.
Hence, investing and forgetting for long will not work. You have to review and re-balance it.
First, understand the requirement of this goal. Whether is it necessary or what? In addition, if you have sufficient surplus after meeting your child’s graduation and your retirement goal, then think about this goal. If you have a surplus to invest after accommodating to goals, which are very sure to come, then think about planning for child’s marriage. Otherwise, simply SKIP!
Why I am harsh and suggesting you SKIP and that too with such emotional financial goal of parents? Because the major responsibility of a parent is to provide quality and good education to their children. Marriage goal may be handled by them. In worst case scenario, you can arrange it with as simple as at the cost of within Rs.10,000 (with register marriage).
However, same can’t be possible in case of education. Hence, if you have a surplus, then plan for it. Otherwise, simply skip this goal.
Many of us have a social obligation and dream of accumulating gold for our kids marriage. However, do remember that Gold is an asset class, which gives you the return of debt product (like Bank FDs) but comes with volatility like a stock market.
Hence, if you aim is to accumulate the gold for future usage, never invest in physical goal. Instead, consider this also as a financial goal, and start investing in equity and debt based on time horizon.
Conclusion: -In my view, the above-mentioned steps will surely help you in identifying “Best child saving and investment plan in India”. No product is best or worst. However, we have to use it wisely to match our goal. Also, there is no single product which we may claim as UNIVERSAL BEST.
Hence, under the process, plan, risk, and requirement. Based on that choosing the product is just an end game.
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Hello Mr. Bashu, I follow you and appreciate and admire you and expecting a suggestion to invest for my niece. Let me share you the case and then you can suggest the best solution.
My Younger brother is not doing well on finances or I would say earning nothing totally dependent on my parent's pension. he recently became the father of a girl, she is below 1 year. we are realizing the case of the brother and looking the future of the baby girl, we want to invest a lump sum amount of 50000 to 1 lacs now somewhere for the girl so that once she grew up then a good corpus could be created which can be used for her education or marriage purposes. so in summary time horizon is more than 15 years. but need to know investment option for my brother that he can manage. he is not techy or financially aware and wants the investment to be in brothers name of kids name.
please advice. the expectation is maximum corpus generation with initial lump sump amount with a long-term horizon and does not require much interference.
Dear Pankaj,
Thanks for your kind words. In my suggestion, the asset allocation between debt and equity should be 40:60. For debt, use Ultra Short Term Debt Fund. For equity, use one large cap and one mid cap. Regarding managing, you invest in his name by the nominee as his daughter and manage the portfolio by creating the login on your own rather than suggesting him to do the same.
is there an option available, where investment can be done by them only and managed by them only. do we have any good long-term investment option, wherein a minimum or no intervention required and corpus keep increasing with good returns?
Point is, do not want me to hold the amount either by managing the account, want everything with them only.
Also if go with your option, you mean funds or in equity individual stocks?
Dear Pankaj,
How can you train them to handle the money when they are not capable of doing this. Also, if you handle the login and all, it does not mean you have to track it on daily basis. Once in a year review enough. I suggested both Debt and Equity Funds.
As you said: "If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70". Should I buy seperate plans for debt and equity? Or is there any plan to set percentage to put amount to debt and equity?
Dear Chinjith,
You have to buy it separately.
Dear Sir,
I have a Term plan of Rs 75 lac and an SIP 3,000 and PPF account yearly 10,000 .My one child is 5 year old and i want to plan his future education,kindly suggest that whether I should by Child education plan or MF or seperate PPF (in the name of my son).
Dear Nirmal,
I already answered your doubts in above post. Please refer once again and then raise your doubts in your next comment.
Dear Mr. Basavaraj
Myself Deepak Sharma. I am 30 and I have a 6 month old daughter. I am looking for a child education plane from the last couple of weeks but didn't get an idea. Which one is the best? personally, I am more keen towards private ones like HDFC and ICICI. But still the same question. Which one is best for my children future. I want to secure her future. Please give some idea.
Dear Deepak,
Do you feel such CHILD PLANS actually suffice your requirement? Stay away from such plans and by referring above post you can decide which is best for you.
Dear Basvaraj,
I am Male, 28 yrs old. I have taken New Jeevan Anand endowment Policy at age of 24 for SA Rs.4000000 with the premium paying and policy term of 35 years. The yearly premium is Rs.112344. I have paid 5 years of premium by now. The vested bonus is Rs.608000. After going through your post, I feel like quitting it. Can you please suggest how to proceed.
Dear Rohit,
If you feel that much life insurance coverage is sufficient for your dependent to survive and if you feel 4% to 5% returns are BEST, then continue the policy. Otherwise, better to surrender.
If I surrender now then how much will I get back? Is it good to leave it and make it a paid-up policy?
Dear Rohit,
Regarding surrender values, check with concerned or nearest LIC Branch. Paid Up is good option when you are about to near the policy term.
HI SIR,
MY NAME IS PRASHANT FROM KANPUR I AM 32 YEARS OLD AND WANT TO INVEST FOR MY BABY WHOM AGE IS 2 YEARS
AND MY SAVING IS 2000 PER MONTH
PLEASE SUGGEST FOR MY BABY FUTURE
THANKS
Prashant-Refer my post properly. If you still have doubts, then we discuss the same.
Yes sir i have doubts which is best this is why i want better advice because this is about my children future
Prashant-BEST AMONG?
Hi Sir,
My son is 9 years old now but havenot started any separate savings for him. Can you pls suggest me best savings options available with decent returns.
Charujay-Refer above post for the same.
Hello Sir,
Nice Article. I am looking for a investment plan for my baby education and future plans. I have been googling since last six months but still i am not able to decide which one is better. My Current portfolio is below.
1. ELSS SIP MF : 1,20,000 annually
2. LIC : Rs. 30,000 Annually
Should i choose ULIP or pure investment plan for my baby ? Or you will suggest for Term + investment plan ? Really hard to decide .
Thanks
Sujit
Sujit-Buy Life Insurance for the sake of protecting your life risk only but not for investment purposes. Regarding choosing equity products, first you have to do asset allocation between debt and equity. Based on that you have to start investing.
Sir, I am now fan of yours. I am a finance guy, but the way you described the above plan step-wise is impressive. Thank you!!
Sham - Pleasure :)
Hi Basavaraj, i'm a 27 year old and have made the following investments:
LIC Jeevan Anand - 46,902 annually (2 payments done)
Reliance Nippon (Make In India) - 99,000 annually (2 payments done)
HDFC Life SL Youngstar Super Premium - 2,00,000/annum (already made 5 payments)
ICICI Prudential Dynamic Plan - Growth 16,000/month
Please suggest if i need a make a few changes in my investments and also if i need to continue HDFC Life or exit and repay my housing loan.
Regards,
Sree
Sree-If your intention is to INVEST, then why you purchased Life Insurance products?