If you are starting a financial planning journey for your child's future, what can be a better day than Children's Day today, November 14, 2023?
Sudheer M, a Sebi Registered Investment Advisor, recommends two instruments mandatorily: a savings account and a Public Provident Fund for minors. In addition, he says that a select few can consider Sukanya Samriddhi Yojana. Sudheer also warns against ULIPs and children's insurance schemes, deeming them unsuitable complex products for children.
The first step into the financial world, a savings account, introduces children to saving. It teaches fund management basics.
Says Sudheer M, a Sebi Registered Investment Adviser, "First and foremost, every kid should have a savings bank account. Opt for one with a debit card, zero balance facility, suitable withdrawal limits, and internet banking that gives them viewing rights. RBI allows children to operate the account after 10 years, so they can even do third-party transfers under parental supervision. This instils banking habits and financial responsibility early on."
Says Sudheer, "Every child should have a Public Provident Fund (PPF) account linked to either of their parents. With a maturity period of 15 years, PPF will mature by the time the kid completes their education. The further lock-in period if you want to extend PPF will only be five years. Children can see the compounding effect, and they can feel proud that they hold a certain amount. Further, the pocket money gets locked in for 15 years without spending, instilling a sense of savings and long-term financial planning."
In PPF, a maximum of Rs 1.5 lakh can be invested in a financial year, offering guaranteed returns of 7.1 per cent compounded annually. The contribution and interest earned are exempted from taxation.
Designed for female children, SSY is a government-supported savings initiative introduced as part of the Beti Bachao Beti Padhao campaign. It currently offers 8 per cent interest rates, tax benefits, and a long-term investment horizon of 15 years.
Says Sudheer, "SSY is normally good for a certain kind of people in addition to PPF. If you are a spendthrift kind of parent, in addition to PPF, you get an additional lock-in."
A BankBazaar report in August said that inflation in school and college education costs in India touched 12 per cent. The report noted that despite the absence of guaranteed returns, equity mutual funds are the only option that beats education inflation.
Market-linked investments, such as mutual funds, also offer the flexibility of liquidation at the investor's discretion. Children's Funds, a variant of solution-oriented mutual funds, have a mandatory lock-in period of five years or until maturity, and they employ an aggressive hybrid strategy. As of November 7, 2023, this category boasts a 1-year average return of 12.19 per cent, a 3-year return of 19.36 per cent, and a 5-year return of 12.69 per cent.
While not an investment, health insurance is essential to safeguard kids' health, especially in the digital age's sedentary lifestyle; including children in a family-floater plan streamlines administration and can lead to premium discounts. However, note that the sum insured is shared among all members, which may be insufficient for specific needs. Consider individual plans for your kids for specialised healthcare, providing flexibility without jeopardising others' coverage. Understand your unique requirements for choosing between a family floater and individual health insurance.
In conclusion, investing or saving for your children is a journey that starts with a simple savings account and evolves into strategic investments tailored to your child's needs.