Investing for your child :: Business Line

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For flexibility, put money in a regular balanced fund and take a term insurance cover separately.

A toddler turns into a rock-star overnight. A teenager aces IIT and becomes a NASA scientist. Advertisements for financial products meant for your child’s future are often high on the emotional quotient. But when deciding between plans, it may pay to not get carried away by the packaging and take a hard look at the features instead.

Insurers offer the largest spread of products for funding your child’s future. The child policies offered by insurers are usually combo products that combine investment with an insurance cover.

As the invested amount in the fund grows, the parent of the child also gets a life cover. Now, what makes these child plans different from ordinary endowment plans is that, on death of the policy holder, the policy doesn’t end. Instead, the insurer pays sum assured to the nominee and keeps the policy going by funding the remaining premiums.

This ensures that at the end of the policy term, the child gets the full investment value of the monies you have contributed.

Usually, the fund value on maturity of the policy will go directly into the child’s bank account. And as these policies mature only when the child turns 18, the fund is also likely to reach the beneficiary at the right time. But before you buy a child policy, you should know a few things:

One, these policies have a lock-in period of 3-5 years. And as most of these products are structured as unit-linked plans, they are front loaded with charges. By exiting these plans in the initial 2-3 years you will end up with a capital loss of 10-15 per cent.

Two, the premium waiver benefit in these policies is offered by most insurers as a rider. So do sign up for the rider. The choice of fund is also critical. Some insurers offer balanced fund options with a higher equity exposure for policyholders who want to build a fund for the child’s higher education. Just keep in mind that a debt fund may appear safe, but may not meet your basic requirement of beating inflation.

Apart from insurers, mutual funds also offer specialised child plans, but the menu is not very large. These are the normal balanced funds (funds that invest in equity as well as debt) offering variations in the form of a higher debt or equity component in each plan. The decision to lock-in the fund here is, in some cases, left to the choice of the investor (as with HDFC Children’s Gift fund).

So, unlike the insurance policy where your money is locked in by mandate, here, you are free to walk out if the fund doesn’t deliver. But, the catch is that funds that do not mandate a lock-in period, do discourage early pullouts through a exit load. Exit loads of up to 3 per cent may be charged if the units are redeemed within the first few years as in the case of Tata Young Citizens Fund and HDFC Children’s Gift Fund.

The appeal of a child plan from mutual funds is dimmed by two reasons. One, obviously, they do not offer a life cover for the parent. Two, unlike the insurance policy where the investment necessarily goes to the major child’s bank account, here, at the time of redemption, if the unit-holder is not alive and the child is a minor, the fund is handed over to the nominee.

However, the point where mutual fund houses score over insurers is that these have a track record of over five years. This makes it easy for investors to gauge their return potential. HDFC Children’s Gift Fund-Investment Plan has given an annualised return of 11.99 per cent in the last five years and tops the list of equity oriented debt funds.