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What not to do for your child

You see the advertisements in a bunch around November 14, Children's Day, every year. They exhort you to invest in your child's financial and educational future.

india Updated: Nov 14, 2010 00:40 IST
Sandeep Singh

You see the advertisements in a bunch around November 14, Children's Day, every year. They exhort you to invest in your child's financial and educational future. But that's definitely not the only day a parent should be thinking about it. Rather, it should be part of your overall, yearly financial planning. And with good reason.

With uncertain inflationary pressures, a growing cost of education, and the ultimate uncertainty surrounding life itself, it's essential to have a holistic approach to securing your child's future.

The first safety net that needs to be guaranteed is in the event of the parent's death. Experts say that parents should insure their life for an amount that's enough to take care child's livelihood and higher education — and then for the rest of the dependents.

"Parents need to take term cover for both the regular expenses and goal-based needs of kids and the family — such as home loan, education and marriage," said Vishal Dhawan, a Mumbai-based financial planner.

But avoid products that offer investment with insurance, say financial advisors. That's because combined products charge higher and do not offer the flexibility of moving out if it underperforms.

Interestingly, experts also advise against child insurance plans. "Don't buy a child plan, since a child does not need it because he has no dependents. Keep the insurance and investment separate, as otherwise it reduces flexibility," says a financial planner who wishes not to be named. "Child insurance plans come with higher cost in initial years and the returns are lower — be it a Ulip or a traditional plan."

Education first

It's important to cover for the combined effect of growing higher education costs and an average inflation rate of 5-6 per cent. Invest so that the payback can cover the cost of education at the time it is required.

But how much costlier will higher education get? Experts say ‘education inflation' is about double the regular, wholesale inflation rate. "If the average inflation is 6 per cent, then for calculating the money required at the time of a kid's higher education, the education inflation should be taken at 12 per cent," says Dhawan.

Let's take a relevant example. If the average cost of doing an MBA in India is Rs 6 lakh now and your kid is 5 years old, then assuming he will go to a B-school 15 years later, you would need around Rs 33 lakh then.

Starting early holds the key. If you need Rs 33 lakh when your child is 20, then it's better to start at the soonest. If you start on a mutual fund systematic investment plan (SIP) when your kid is five, and your investment returns 12 per cent a year, then an investment of Rs 6,600 a month will get you there. However, if you start when your kid is, say, 10, then you have only 10 years to pool the amount. And your monthly requirement to meet the target will by Rs 14,300.

The best route
You are planning for more than a decade, so you need to cover for the risks any one route may incur. "One does not know how an investment will perform over 15 years. So I would suggest a combination of mutual funds, stocks and insurance," said Lovaii Navlakhi, managing director and chief financial planner at International Money Matters.

But keep in check the amount invested in equities. To guard against vagaries of the stock market, withdraw most of the amount invested in equities a couple of years before the time the whole investment will have to be encashed, and place it on a more secure investment route.

Surya Bhatia, a Delhi-based financial planner, gives the details: "If your investment is for 15 years, reduce the equity exposure to 50 per cent in the 13th year, 30 per cent in 14th year and 10 per cent in the 15th year."

That way you ensure that you are covered even if the stock market tanks.

Three things to heed while planning for your kid:
Do not take a life insurance cover for your kid.
Do not club insurance and investment for meeting financial goals.
Rely less on stocks as the time to encash nears.