The biggest financial worry for most parents is How to secure their children’s future!
How to fund their higher education? How to fund their marriage? In southern states, the gold transacted during the marriage is in kilos, and in states like Punjab; a luxury car is part of the marriage gift!
My friend Bharath came to me having the same concern. He was constantly followed up by his insurance agent to buy the best child plan for education and marriage.
But Bharath took part in a webinar on personal finance conducted by Holistic Investment. The experts in that webinar suggested – Never mix Insurance with Investment.
Bharath is working in the software sector and is having a son and a daughter. He is aged 35 and his son and daughter are both aged 8 and 6 years.
His wife Rishika is a housewife who takes tuition to keep herself active. Bharath is worried about how to plan for a secure future for his kids.
He doesn’t have any idea which stream, his kids would prefer when they grow up. They can opt for management, engineering, medicine, teaching, etc. as per their choice.
The only thing, he can do is to plan in advance, so that he will have the necessary amount for their education.
Parents spend every day, thinking about the education and marriage expenses of their children, We hope this article will provide you with enough insights that will help you ease your anxieties.
Let’s get started!
Table Of Contents
1.)Child Future Plan – Why it is essential?
2.)Child Plan With Insurance
3.)Child Future Plan- Higher Education Cost
4.)Child Education Plan – How To Invest?
5.)How to Plan for Children’s Marriage Expenses?
6.)Child Future Plan – The Best Investment
7.)Child Future Plan – PPF
8.)Child FuturePlan – Q&A
1. Child Future Plan – Why it is essential?
“Parenting is the biggest sacrifice one can make. It’s putting your life on hold to fulfill the promise of your children’s tomorrow”.
Life is uncertain!
That does not mean that we should keep pondering over the inevitable. The wise thing that we can do is plan a future that will make us face any amount of difficulties that the universe has in its plans for us.
The same applies to the future of your children, a best-child plan will help him/her to thrive and reach their goals despite all odds.
2. Child Plan With Insurance
‘Child Plan with Insurance’ is also similar to ULIPs or Endowment policies that combine insurance with investment. Considering that these plans include an insurance component, the cash invested in them is little which may be inadequate to meet the demands of your child’s marriage and education expenses in the future.
Another disadvantage of these plans is that part of your premium allocation charges is used to pay commissions to distributors. This could result in a low initial return and further losses if the investor leaves before the tenure is over.
When compared to a Term Plan, Child Plans are more expensive. Instead of paying a large premium for a child plan, a parent can get a Term Plan for him/her for the same life cover and invest the remaining amount in Mutual Funds. There will be a larger corpus on maturity.
Let’s see how much Bharath has to spend on Term Insurance.
Term Insurance For Bharath
Bharath is 35 years old now and earns ₹24 lacks per annum, let’s say he works till 60 years and plans to retire after that.
So, for a term of 25 years, Bharath has to take a Life cover of ₹3 crores approximately.
The premium he has to pay is ₹33,901 per year.
In the unfortunate death of Bharath, the family will get a corpus of 3 crores and they can use this money to invest further in Mutual Funds.
Let’s see how Bharath can invest to meet the education and marriage expenses of his children.
3. Child Future Plan- Higher Education Cost
Before going further, we should study the costs attached to higher education and marriage. With the opening of more and more hi-tech colleges in many sectors, the cost of higher education is skyrocketing.
If you want to send your child to medical education, the cost can be above ₹25 Lakhs per annum for Post Graduation.
Post Graduate degree in Engineering can be managed within ₹15 – 20 Lakhs. The cost of an MBA course varies between ₹4 Lakhs and ₹25 Lakhs depending on the college.
The silver lining is the availability of Education loans at reasonable rates. You can easily manage an education loan in the range of 12-14% interest.
The interest paid on the loan can help you and your child in saving Income Tax too.
4. Child Education Plan – How To Invest?
After seeing the current trend in education costs, Bharath is planning to create an amount of ₹20 Lakhs for each of his children when they are aged 18.
He expects the cost to escalate @ 8% per annum.
Let us see the plan for Bharath.
- The value of ₹20 Lakhs after 10 years for his son: ₹43 Lakhs
- The value of ₹20 Lakhs after 12 years for his daughter: ₹50 Lakhs
If you assume an annualised return of 12% from Equity Mutual Funds,
Bharath can manage to create an amount of ₹43 Lakhs by investing ₹19,000 per month in the next 10 years.
He can create ₹50 Lakhs for his daughter by investing another ₹16,000 per month.
Bharath has to invest ₹35,000 per month for Higher Education Expenses alone.
5. How To Plan For Children’s Marriage Expenses?
Bharath wants to spend ₹10 Lakhs for his son’s marriage, whereas he wants to spend ₹20 Lakhs for his daughter’s marriage.
These are at current costs and he expects an average cost escalation of 6% in marriage expenses.
- Value of ₹10 Lakhs after 18 years of son’s marriage: ₹28 Lakhs
- Value of ₹20 Lakhs after 19 years for daughter’s marriage: ₹60 Lakhs
Assuming a 12% investment return in equities,
Bharath has to invest ₹4,000 for his son and ₹7,000 for his daughter.
So, Bharath has to invest ₹11,000 for the children’s marriage needs.
Bharath has to plan for an investment of (35000 + 110000) =₹46,000 per month.
At present, he is investing ₹10,000 per month in Mutual Fund SIPs.
What is required is an additional ₹36,000 investment in SIPs to make it ₹46,000.
6. Child Future Plan – The Best Investment
Bharath can do the SIPs in 4 – 5 good-performing Mutual Funds from reputed Fund Houses as per the recommendation of his Financial Planner.
He has to review the performance of these funds on a half-yearly basis and take corrective steps if necessary.
All funds will not perform well for long periods. He should reduce the equity component when he is nearing the goal. It is recommended that in the last 3 years before the goal, the SIPs can be in Debt Mutual Funds.
With an average annual salary increase of 10% in the IT sector for the last 5 years, Bharath is confident of continuing these SIPs for the future needs of his children.
7. Child Future Plan – PPF
Public Provident Fund, popularly known as PPF, is a good fund option for risk-averse investors.
One of the finest options for preparing for future education and marriage costs is to open a PPF account in a child’s name for 20 years.
If the funds are transferred from the parent’s account to the minor’s PPF account, Section 80C of the Income Tax Act grants an exemption.
Due to the compounding effect, an annual investment of merely ₹100000 in PPF would result in about ₹46lac.
A “Child Plan” with insurance components and up-front costs finds it challenging to give you such a large return without taking on a lot of risks.
8. Child Future Plan – Q&A
i) Is the LIC Child Plan good?
Insurance Companies and LIC`s child education plans are normally traditional policies that will not give you more than 5%-6% returns.
The returns from these policies would not be sufficient to fund the educational expenses and marriage expenses of your child.
ii) How to calculate the amount for Child Marriage expenses?
This Child Marriage Calculator will help you calculate the amount needed for your child’s marriage expenses.
iii) What is the Best Child Plan with One-Time Investment?
Don’t fall into the trap of only a one-time investment plan for your child. It is also advisable that a slow and steady investment with good returns is a safe bet.
iv) What is the Best Investment plan for the girl child in India?
Apart from the investment plan mentioned above in the article, you can also opt for the Sukanya Samriddhi Account for the girl child in India.
Though the locking period for this plan is quite long the interest rates are high compared to other investments.
v) What is the current interest rate of Sukanya Samriddhi Yojana?
The current interest rate of Sukanya Samriddhi Yojana is 8% in 2023.
vi) Which is the Best Child Plan LIC or Child Education Plan SBI?
‘The Best Child Plan’ varies according to the needs of the particular child.
Some of the key factors to be taken into consideration are, the number of children a family has and what kind of higher education their children want to pursue, do they want a grand or simple wedding, etc.
Even though all these factors are variables, there is still a constant factor that is under our control. That is, “Not mixing Insurance with Investments”!
We have seen how Mutual Funds help you fulfill the educational and marriage costs of your children without the need for a huge chunk of investment.
Please consult a professional financial planner for a comprehensive financial plan for the well-being of your children.
Also, share your views. What according to you is the Best Child Plan for education and marriage in India?