Majority of parents have this question which causes them great worry – how to invest money for my child’s future? A simple search on Google reveals that the media is almost totally covered by insurance companies offering traditional and unit linked plans in the name of child benefit plans.
I have discussed earlier on my blog why traditional insurance plans are not recommended. Read about it here.
The best way to invest money for your child’s future needs including education and marriage remains the term insurance + diversified mutual funds combination.
Why Child Insurance Plans Are Not Advisable:
Child Insurance Plans which are in the nature of traditional plans have a guaranteed payout. However, the cost of this guarantee is that the returns will be abysmal. In Unit Linked plans the investments are made in equity markets or debt markets as per your choice of funds and the returns are higher. However the downside is that there are heavy upfront charges in unit linked plans which are deducted from the premium right-away. And so, your investment amount is reduced to that extent.
Normally in child insurance plans, one of the parent is the life assured and the child is the nominee. In case of untimely death, the sum assured or fund value is given to the child. In case of survival, periodic payments are given out.
How Does The Term Insurance + Mutual Fund Combo Beat Every Other Option:
None of these plans can beat the combination of term insurance plan + diversified mutual funds both in terms of risk cover and returns generated over the long term.
Most parents start investing early for their child. If your child is 5 years old, you have at least 13-16 years before you need money for their higher education. This is a good enough time for generating decent returns though mutual funds.
On an average, mutual funds have generated approximately 17% returns over the last 20 years. No other asset class has been able to give that kind of returns consistently. See historical performance of mutual funds in India.
Hence, the best way to invest money for my child’s future is:
- Purchase a term insurance plan with sufficiently high risk cover to mitigate the derailment in plans caused in case of untimely death of the parent.
- Invest the remaining amount of money in diversified equity funds with a long term horizon of 10 years or more for inflation beating returns
One of the doubts that people might have is that child benefit plans offer waiver of premium after the death of the parent. The policy continues and gives the proceeds to the nominee at the appointed times. In case of term plans and mutual funds, there is no such continuation.
However, my view is that the death benefit received in term plan is very high compared to traditional plans. The money can be re-invested into systematic withdrawal plans (SWP) of debt mutual funds for regular / periodic income. The earlier mutual fund investments done by parent can also be converted into debt funds SWP. And suppose if the nominee / family doesn’t want to get into mutual funds, even then the simple way is to invest into FDs and periodic / regular income can be made possible.
Wish your children a successful and bright future