Economic Times, 12/1/2011
Don’t be misled by agents. Look beyond Ulips for your child’s future.
Thirty-year-old Amit Goenka had just become a father of a baby girl. After the initial euphoria subsided, he decided to buy an insurance plan — Life Insurance Corporation’s (LIC) Komal Jeevan plan, a child unit-linked insurance plan (Ulip) to secure the future of the family’s newest member.
He is one amongst the huge tribe of parents who have chosen to put their faith in child Ulips that promise continuity in the funding of the child’s education even in the event of the parent’s death. These schemes have been best sellers for most life insurance companies and thus form an important part of their portfolio. It is easier to strike a chord with parents by talking about insulating their children’s future from any undesirable events. Consequently, selling child plans is easier as well. Many parents, thus, are completely taken in by the idea of achieving their dream of their child being able to complete his/her education in their absence.
In addition to the sum assured that is paid at the time of the policyholder’s demise, future premiums are waived off and the fund value is made available to the child on maturity. Riders providing for loss of income arising out of the parent’s (the insured) death or disability are also touted as one of the reasons why child plans score over other investment options. Most companies also offer waiver of premium riders, which ensures that the company continues to pay the premium if the parent passes away. Over a period of, say 15 years, regular investments will ensure that the fund grows into a substantial amount, which may not be possible in case of a one-time , small lump-sum investment.
Like several other parents, Amit, too, had various options to choose from. For instance , simple bank fixed deposits, Public Provident Fund (PPF), Reserve Bank of India (RBI) bonds, diversified equity mutual funds, post office instruments like monthly income scheme (MIS) and, of course, pure equity (stocks). Most parents, if not all, invest in more than one product to secure the future of their children, provided the pocket permits the luxury.
Many fund houses also offer schemes dedicated for children. “Apart from two child Ulips, I also invested in a mutual fund scheme dedicated for children ,” Amit adds. For instance, UTI Mutual Fund offers CCP Balanced Fund and CCP Advantage Fund. The two schemes, which collectively manage around Rs 3,000 crore, have given around 12% in the past. Anyone can invest in the name of his/ her child below the age of 15 years. When the child turns 18, s/he has the option of withdrawing the money completely or doing so in a phased manner. Some of the other mutual fund schemes currently available in the market include HDFC Children’s Gift Plan, ICICI Prudential ChildCare, LICMF Children Fund, Magnum Children’s Benefit Plan and Tata Young Citizens.
Look Before You Leap:
Most investment experts are of the view that these funds are not necessarily meant for children. They are more of a marketing gimmick which fund houses adopt to woo investors. After all, even a simple equity diversified fund is capable of generating a similar performance. The table above reflects the performance of such dedicated child mutual fund schemes over the past five years compared to the returns from the equity diversified fund category.
Remember, equity is the best- performing asset in the long run. While debt, or income , funds are considered ‘safer’ avenues, their ability to generate higher returns is also constrained . In contrast, equity schemes have the potential to deliver superior returns in the same timeframe. Also, since the children’s needs are a good 10 years or more away, you also have enough time to weather the volatility in the market. Over the past 15 years, Sensex, the BSE benchmark, has given returns at a compounded annual growth rate (CAGR) of 13%. That is why investment experts want you to seriously consider equity schemes while investing to secure your child’s future.
Child Ulips Are Expensive:
Likewise, while it is convenient to invest in insurance plans, it is an expensive proposition. Financial planners are of the opinion that one should never buy an insurance policy with an investment objective in mind. They may be popular, but they are complex in nature, making an analysis of their performance an arduous task.
“Despite the cap on Ulip charges, the costs cannot be termed reasonable. Also, I don’t see them yielding significantly superior returns to justify the huge charges levied,” points out certified financial planner Amar Pandit. Child ulips are, in fact, costlier than even regular Ulips, owing to features such as waiver-of-premium and loss-of-income riders.
The Ideal Approach:
The best way to increase your kitty is by investing in diversified equity mutual funds with a good track record, as they are flexible instruments that offer the optimum mix of return, liquidity and tax-efficiency . However, the equity component means they come with associated risks. You should go for them if you are willing to stomach any short-term volatility and are prepared to dig in for the long haul. “There is no doubt that starting a SIP (systematic investment plan) in a diversified equity fund and staying invested over the long-term is the right approach when it comes to financially securing your child’s future,” adds Pandit.
On an average, these schemes are much better positioned to tackle market risks, primarily because the constituents of a diversified equity scheme are determined by the fund manager who tries to encash upon the opportunities thrown open by the market from time to time. The fund manager is at liberty to reduce the weightage of non-performing or volatile sectors or stocks in the portfolio and increase the weightage of the hot and roaring sectors.
A SIP in a large-cap , equity diversified fund should be combined with a term insurance cover to safeguard your child’s future. Though there is nothing to be gained in monetary terms if you survive the tenure of the policy, you would have ensured a large sum for your child in your absence at a fraction of a Ulip’s cost. However, don’t treat this lightly.
All the attractiveness of death cover, disability cover and so on can be obtained by pure insurance plans designed to cover them. This will make sure that your child’s future remains secure no matter what happens to the parent. Make sure that you have a life cover that is adequate — simply put, the cover should be enough to provide for sustenance of your family.
What must be kept in mind is that investing for a child is no different than investing for yourself. The principles remain the same.