34-Year-Old Seeks Advice on Child Plans, Mutual Funds, and Insurance

Thank you sir for your detailed evaluation and explanation. Please suggest which are better child plans? Can I open mutual fund in my sons name or I have to open in my name and then transfer when they start earning? Does stopping conventional insurance plans in between have any monetory losses?

Ans: When it comes to investing for your child's future, mutual funds via Systematic Investment Plans (SIPs) are often a far better option compared to traditional child plans like endowment or ULIPs. SIPs offer flexibility, higher growth potential, and liquidity. Here’s why SIPs in mutual funds stand out:

Higher Returns: Mutual funds, especially equity-based, have historically provided better returns than conventional child plans. Over a long horizon of 10-15 years, equity funds can outperform with compounded growth.

Flexibility: Unlike traditional insurance plans, SIPs in mutual funds give you the flexibility to change the amount, increase contributions, or even withdraw in times of need without penalties.

Liquidity: Mutual funds offer easy access to funds when needed for your child's education or other milestones. Traditional child plans usually lock your funds for longer durations.

Can You Open Mutual Funds in Your Son's Name?
Currently, you cannot open a mutual fund account directly in the name of a minor without appointing a guardian (usually the parent). The mutual fund account has to be in the name of the child, but under the supervision of the guardian (you).

Once your child turns 18 and starts earning, the account can be transferred to their name. Until then, you will manage the account, make decisions, and have control over withdrawals.

Process of Opening a Mutual Fund for Your Child
Open a Minor Account: You, as the guardian, can open a mutual fund account in your child's name. The KYC process will require both your and your child’s documents.

Transfer on Adulthood: When your child turns 18, the account can be transferred to their name, and they will take over managing the funds.

SIP in Your Name: Alternatively, you can start SIPs in your own name and later, when your child starts earning, transfer the corpus or investments to their name. However, capital gains tax might apply if you sell units for transfer, so consult a Certified Financial Planner before doing so.

Stopping Conventional Insurance Plans Midway: Monetary Losses
If you're considering stopping conventional insurance plans like endowment or ULIPs, it's important to understand the potential monetary consequences:

Surrender Charges: Traditional plans usually come with surrender charges if you discontinue the policy before the maturity period. These charges can reduce the amount you get back.

Low Returns on Early Surrender: These policies offer returns only when held till maturity. Stopping midway may result in lower payouts than the premiums paid, causing financial loss.

Bonus Forfeiture: Many traditional policies promise bonuses. If you stop the policy early, you may lose out on these accumulated bonuses.

What to Do Instead?
Rather than continuing with low-return child plans or insurance policies, you can:

Switch to Mutual Funds: Move towards SIPs in mutual funds, especially equity-based funds for long-term goals like education. These will offer higher returns over time.

Keep Insurance Separate: Always keep your insurance and investment goals separate. Continue with a term insurance plan for life coverage, and use mutual funds for wealth creation.

Final Thoughts
For your child’s future, SIPs in mutual funds are better than traditional child plans.
You can open a mutual fund in your child’s name, with you as the guardian, and later transfer it when they turn 18.

By choosing the right investment strategies, you can ensure a brighter financial future for your child.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: When planning for your children’s future, especially their education, it’s natural to consider different investment options that provide financial security. You mentioned that you already have a term insurance plan, which is an excellent foundation for life coverage. Now, you're contemplating whether to invest in a child insurance plan or stick with mutual funds for your children’s education.
Both options come with their advantages and considerations, but they serve different purposes and operate on different financial principles.

1. Understanding Child Insurance Plans
Child insurance plans are a combination of insurance and investment. They are designed to secure your child's future in case of your untimely demise while also offering a financial corpus for education or other major milestones. Here’s a breakdown of their key features:

• Life Coverage: In the event of the parent’s death, the insurance component of the child plan ensures that a lump sum is paid to the child or the nominee. Some plans also waive off future premiums, ensuring the plan continues and the investment portion keeps growing.
• Maturity Benefits: Child insurance plans provide maturity benefits, where a lump sum amount is paid when the policy matures. This is typically aligned with the child reaching adulthood, making it a useful fund for higher education or marriage.
• Premium Payments: Most child plans require regular premium payments, which can be annual, semi-annual, or monthly. Some plans allow partial withdrawals for education or emergencies without breaking the plan.
• Risk Management: Since these are primarily insurance products, they have a lower risk factor than equity mutual funds. However, this also means that the returns may not be as high as those generated by more market-driven instruments like equity funds.

2. Pros and Cons of Child Insurance Plans

Pros:

• Financial Security: The primary advantage of child insurance plans is the built-in life coverage. In the unfortunate event of the parent’s demise, the child’s education and future are safeguarded.
• Guaranteed Payout: Child insurance plans offer guaranteed payouts either at maturity or as a death benefit, providing a predictable source of funds for education.
• Premium Waiver: Many plans come with a premium waiver in case of death, ensuring that the policy continues even if the parent is no longer around to make payments.
• Tax Benefits: Premiums paid toward child plans qualify for tax deductions under Section 80C of the Income Tax Act, and the maturity benefits are tax-free under Section 10(10D).

Cons:

• Lower Returns: Compared to mutual funds, child insurance plans often deliver lower returns as a significant portion of your premium goes toward the insurance cover rather than investments.
• Lock-In Period: Child insurance plans come with a long lock-in period, which reduces flexibility. In case of any urgent requirement, it may not be easy to access funds as you can with other investments.
• Higher Costs: The combination of insurance and investment usually means higher premium costs compared to what you might pay for a standalone term plan plus an investment in mutual funds.

3. Mutual Funds for Child’s Education

Mutual funds, particularly equity mutual funds, are market-linked instruments that offer the potential for higher returns, especially over the long term. Here’s why they are often recommended for funding long-term goals like a child’s education:
• Flexibility: Mutual funds offer a wide range of investment options based on your risk appetite. You can choose from equity, debt, or hybrid funds depending on your financial goals and timeline. For long-term goals like education, equity mutual funds or balanced funds tend to perform well, offering the potential for inflation-beating returns.
• Higher Returns: Historically, equity mutual funds have provided better returns than traditional insurance-linked plans or debt instruments. Over a period of 10-15 years, a well-chosen equity fund can deliver double-digit returns, helping you build a substantial corpus.
• Systematic Investment: With mutual funds, you can invest through Systematic Investment Plans (SIPs), which allow you to contribute a fixed amount monthly. This helps in rupee cost averaging and reduces the impact of market volatility.
• Liquidity: Mutual funds, especially open-ended funds, offer greater liquidity than child insurance plans. You can redeem your investments anytime without hefty penalties, making it easier to access funds when needed.
• Goal-Oriented Approach: You can tailor your mutual fund investments according to your specific goals. For example, you could allocate a portion of your portfolio to large-cap equity funds for stability and another portion to mid-cap or small-cap funds for higher growth potential.
• Tax Efficiency: Equity mutual funds held for more than a year qualify for long-term capital gains (LTCG) tax, which is currently 10% on gains above Rs 1 lakh, making them tax-efficient for long-term wealth creation.

4. Why Mutual Funds Might Be Better for You

Given your situation -- a 40-year-old with two children aged 12 and 9 — mutual funds could be a better fit for several reasons:

• Time Horizon: You likely have around 5-10 years until your children begin their higher education. Mutual funds, particularly equity funds, have the potential to deliver higher returns over this period compared to child insurance plans. This is crucial, as education costs tend to rise with inflation, and you’ll need an investment vehicle that can keep up with or exceed this rate.
• Flexibility: Mutual funds allow you to adjust your portfolio over time. For example, you can start with equity funds while you’re further away from your goal and gradually shift to safer debt funds as your children approach the age when the funds will be needed. This flexibility is hard to find with insurance-linked plans, which tend to be more rigid.
• Lower Costs: By opting for mutual funds, especially direct plans, you can avoid the high costs and commissions typically associated with insurance products. This allows more of your money to work for you in the market.
• Goal Alignment: Mutual funds can be more aligned with the specific goal of education planning. You can even consider investing in child-specific mutual funds, though these operate similarly to regular equity or hybrid funds, with an added emphasis on the goal of education.

5. Conclusion: Stick with Mutual Funds

While child insurance plans offer the benefit of life coverage and guaranteed payouts, they may not be the most efficient way to fund your children’s education due to their lower returns and higher costs. Since you already have a term insurance plan, which covers the life insurance aspect, mutual funds seem like a better fit for building a substantial education fund. Their potential for higher returns, flexibility, and tax efficiency make them more suitable for long-term goals like your children’s higher education. By carefully selecting a mix of equity and hybrid funds, you can likely achieve your financial goals while maintaining the flexibility to adjust your investments as needed.