How to save smartly for your child's future

A comparison of unit-linked child plans and mutual funds.

Saving for a child’s future is among the most important priorities of a family. Bangalore-based Devendra Vijay wants to start saving for his eight-month-old daughter’s higher education. The 30-year-old wants to create a Rs 20 lakh corpus in 15 years.

But he was swamped by a multitude of options. There were unit-linked child plans being offered by insurers, as well as mutual fund schemes. Also, creating an own plan through stocks or property is possible. But each route has its own advantages and disadvantages.

Insurance child plans
After the new unit-linked insurance plan (Ulip) guidelines by the Insurance Regulatory and Development Authority, insurers have been quick to launch products in this segment. While Aviva launched Young Scholar Advantage, HDFC Life started marketing its YoungStar Super II and YoungStar Super Premium.

How do these work: In child plans, if the parent (policyholder) passes away, the insurer pays the premium so that the child receives the targeted corpus on maturity. There is more flexibility in the new schemes. For example, Aviva Life Insurance offers riders such as increasing the cover, accident and disability benefit, and a rider that allows regular income to a child in case of a parent’s death. HDFC Life has introduced options, wherein an individual can opt for an annual payment to a child equivalent to the annual premium (without a rider), if the parent passes away before the policy matures. Earlier, there were only one or two riders.

Why invest: The structure of Ulips disciplines an investor, as there needs to be an annual payment of premium. Also, there is a five-year lock-in.

Drawback: Investing through Ulips is still expensive, even after the new guidelines. “If an insurance company is paying the premium on behalf of the policyholder in case of his/her death, the cost of such a feature is built into the product,” says Gaurav Mashruwala, a certified financial planner. Typically, this charge is built into the mortality charges that the company deducts from the premium.

Mutual fund child plans
Many mutual fund houses such as UTI Mutual Fund, Tata Mutual Fund and Franklin Templeton Asset Management have these schemes for over a decade.

There are impressive add-ons, as well. Some funds accept the application only in the name of a child. It is done to deter parents from utilising the money for other purposes. They also offer an option whereby a parent can lock-in the investments, which cannot be redeemed until the child attains the age of 18 years.

Composition: These schemes are structured, either as balanced funds or monthly income plans, which are low on equity. However, asset allocation between equity and debt differs from fund to fund. For example, UTI CCP Advantage, a balanced fund, has the mandate to invest up to 100 per cent in equity, and 35 per cent in debt. Tata Young Citizens can invest a maximum of 50 per cent in equity and 50 per cent in debt.

Some schemes also offer a personal accident insurance cover. These include ICICI Prudential and Tata Mutual Fund. ICICI Prudential covers one parent for Rs 5 lakh or 10 times the units held, whichever is lower. Tata Mutual Fund covers a child from personal accident for Rs 1.5 lakh.

Why invest: Mutual funds are low-cost products.

Drawback: These funds follow a set asset allocation. Higher debt allocation restricts the returns. The personal accident insurance too has caveats, and one needs to understand the terms and conditions.

Own plan
While doing it on your own, the flexibility is maximum. But there are pitfalls as well, including a lack of discipline, that may creep in.

For Vijay, the tenure of the goal is 15 years. A monthly saving of Rs 4,500 in an equity-diversified mutual fund at 12 per cent returns annually can help him create the desired corpus. A term plan with a cover of Rs 20 lakh would cost him Rs 3,000 a year.

Why invest: Planning on your own can help you reduce costs associated with investments. You have the control over asset allocation and choice of products.

Drawback: If you set out on your own, you will need to monitor your investments regularly. In addition, market conditions can influence your investment decisions.