You don’t need to buy a children’s plan to invest for your children

by Manshu on May 25, 2012

in Opinion

I feel that investing is a lot more about emotions than it is about numbers, and it becomes even more emotionally charged when you think about investing for your children.

I regularly get emails about investing for children and there are two common things about all such emails.

The first one is the use of the word “best”. I’ve never seen someone write in to ask about a “good investment” for their children. It has to be the best investment, how can it be anything else?

The second thing I notice about these emails is that they generally refer to a children’s plan or a product that has the word “children” in it.

I think there is a general perception that plans or products that have the word “children” in them are significantly different from other plans, and only these plans should be used when you’re thinking about making investments for your children.

I don’t think there is that much difference though, and I’m fairly certain that if I made a table with the features of 5 plans and didn’t disclose which ones were children plans and which ones were other ones – it would be quite hard even for financial advisers to tell one from the other.

At their core, all plans or products invest in a few asset classes, give some insurance cover and have a certain time frame for maturity.

Instead of being swayed by the adjective of the plan you need to look at the components of the plan.

It’s a great idea to invest for your children and an even better one to start early, but you don’t really need to rely on any children’s plan for that. You can make that plan yourself with a little common sense and the right research.

Everyone knows what the big expenses are going to be – schooling, higher education, perhaps studies abroad and wedding, and if you start planning early and allocate money specifically for a purpose and invest in an asset accordingly you can build a good base for it.

For example, a Rs. 1,011 SIP yields Rs. 10 lakhs in 20 years if the money grows at 12%. You can put this relatively small amount away every month in a balanced fund with the idea that this will be used for higher education, and since you’re not going to need it for a very long time period you can ignore the volatility of the market and keep accumulating the funds. Similarly you can start with goals and work backwards to find a product that suits your need for any other goal that comes to mind.

Plan first, and then buy the product that suits that plan, let the dog wag the tail, don’t let the tail wag the dog.

{ 32 comments… read them below or add one }

Ashok May 25, 2012 at 8:17 am

I have a question. Is there a difference between the Children’s plans and the traditional plans in terms of how the insurance amount is disbursed, in case the insured dies?
I mean I can see three options here:

The insurance company pays the school/college for the fees directly or thru a trust fund.

Or it is disbursed to the child? In which case what happens if the child is a minor/doesn’t have a bank account?

Or as in traditional Insurance, it disburses to a nominee and the nominee has the responsibility to pay for the child’s education or blow it up. This is no different from traditional term/ULIP plans.
So how is it?

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Manshu May 25, 2012 at 7:29 pm

I haven’t seen anything that made me take notice and say well this is much better.

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Indian Thoughts May 25, 2012 at 11:44 am

well i think i shoudl stop commenting because, for most of your articles, all i have to say, exactly thats what i think.
thsi is something i was looking at recently and whenever u speak to anyone if its for children, it has to something “*child*”. I don’t understand why?

Why simple SIP + term insurance suffices and ppl will give u junk answers.

awesome peace as always. kudos to you.

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Raja May 25, 2012 at 4:44 pm

I had read your blog some time back too and am amazed at your diligence and perseverance. Kudos to you!! One of the thing that keeps me motivated in my PF is a desire for having a annual non-salary income (dividend+interest) equal to my annual expense. Of course am no where near that goal yet. But still the yearly inching towards that goal keeps me very motivated. One thumb rule which makes sense to me is, if one can accumulate 50 times of his annual expense, he can then relatively easily generate a 2% dividend yield on that corpus to meet his annual expenses from non-salary income and hope that the dividend yield growth will keep pace with inflation and take care of his future needs. At the same time keeping the corpus intact or growing over time. Thought of sharing that you, see if it makes sense to you.
The normal goal or life stage based investing never made much sense to me. Of course accumulating 50 times annual expenses sounds like a very lofty goal at first. But if you consider the beauty of compounding, it may be is not that difficult. Bringing down one’s expenses to a reasonable level is also part of the equation.

Regards
Raja

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Manshu May 25, 2012 at 7:38 pm

She is one of a kind Raja!

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Indian Thoughts May 25, 2012 at 8:02 pm

i thought this is manshu’s blog but still thanks alot. I can’t tell how humble I am feeling right now.

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Manshu May 25, 2012 at 8:06 pm

I’m only writing because there is a smart and sincere community here that’s fun to interact with. Otherwise it’s not pleasant to scour annual reports and prospectuses on weekends!

But I do want to know about your thoughts on what Raja is saying….

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Indian Thoughts May 25, 2012 at 8:05 pm

i also aim for something similar but as a woman biggest challenge i face is keeping everybody involved. Sometimes ( read most of the times) my extended family will not cooperate. But this community helps me stay focussed. SO i thank manshu and all of you for such a great community.

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Manshu May 25, 2012 at 7:27 pm

If you stopped commenting then that will be a terrible tragedy, so let me write a post about how everyone should use the funds in their emergency funds and buy penny stocks to earn 400% return in 4 weeks.

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Indian Thoughts May 25, 2012 at 8:01 pm

former thing i can’t do and latter u can’t πŸ˜‰

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Nargis May 25, 2012 at 11:51 am
Manshu May 25, 2012 at 7:19 pm

Hi Nargis,

ULIPS are very complex and it takes me about three or four times the time I take to write about a ULIP than it will take for another topic, and I’m running very short of time these days, in fact I’ll be traveling most of next week so don’t expect this any time soon.

As for the links, I appreciate that, but I just look at the prospectus and any other material from the issuer and then if I have specific questions Google them up. Thanks anyway and I hope you understand why it takes such a long turn around time from the time someone posts a suggestion to the time the post appears sometimes.

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Nargis May 29, 2012 at 6:56 pm

Thanks Manshu and please excuse me for being a little pushy. I know and understand your selfless committment toward your blog readers . Please take your time to do it, however, I will look forward to your review.

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Manshu May 30, 2012 at 5:09 am

No that’s fine. I didn’t think you were being pushy at all, and I quite appreciate the follow up. Thanks!

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Raja May 25, 2012 at 4:40 pm

“Everyone knows what the big expenses are going to be Γ’β‚¬β€œ schooling, higher education, perhaps studies abroad and wedding”

You have rightly added the word ‘perhaps’ before ‘studies abroad and wedding’.

My opinion is saving for children’s wedding is sheer madness. Let them find their own way and if not go for a simple marriage. Of course i spent for mine (not taken) and my sister’s (given) too, so i think that’s the right way. Hope you understood the meaning of words in bracket. Having done my studies in North East, i now completely hate the idea of showing off and spending on occasions like marriage .

Studies abroad ? God knows how it will all pan out 20+ years from now. May be we will have people coming from abroad to study in India. If we grow to our potential and ‘needs’ then jobs will be here and institutions of study and rest may follow.

Regards
Raja

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Manshu May 25, 2012 at 7:13 pm

I get your meaning Raja and I agree with what you’re saying as well. I think most people will end up spending a lot of money in terms of wedding being a being expense just the way the culture is and that’s not going to change anytime soon.

However, there is such a thing as not crazy wild spending. Some of the weddings that I attended in Delhi just blew my mind what how much extravagance there was. It feels like there is a rush to spend money and show that money is being spent but that doesn’t translate to good aesthetics and even decent value for money. This is a loaded subject though, I’m sure people have a lot to say about this.

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Raja May 25, 2012 at 9:38 pm

Another reason i think ppl are so crazy about the children’s plan is because of our love for our dear Sachin and the like’s who come on tv and remind us every time about the virtues of it. who can argue with them ? It’s kind of a social fad. I’ve seen very senior industry ppl who manage sizable client accounts in big IT MNC’s and have done MBA…falling for these…. So .. it happens !! normal public can be excused…

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Jitendra P.S.Solanki May 26, 2012 at 7:11 am

Hi Manshu,

The only good part which i liked in children plan is the feature when you are not there. Yes charges are way high and primarily because of this feature.

Still i feel the products will suit those people who cannot make a regular contribution year on year and wants to have this financial security.

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Ashok May 26, 2012 at 7:26 pm

Hi Jitendra,

Can you please read my question above and reply, if you know the answer?

To the three options I have already mentioned, there can be a fourth option : The insurance company pays the (non-minor) nominee periodically (say, yearly) at the start of the academic year so that the nominee can pay the school fees. This may ensure that the nominee uses it only for education.

Otherwise how else is a children’s plan better than Term insurance when you are not there ?

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Jitendra P.S.Solanki May 30, 2012 at 11:20 am

Ashok,

The payout in the children plan happens to the proposer or the nominee as per the situation.

No way it can be compared to a term plan.But as i wrote the only feature which attracts people in this is that in case of death of the policy holder the policy continues as it is where company pays the future premiums and a SA is paid to the nominee at time of death of policyholder. Thsi feature is unique to these plans only.

Yes these products are costly. But with such a large population, some of them will consider this product especially when they do not have regular income and cannot make regular contribution month on month.They prefer paying a lumpsum in a year.the feature gives them a level of security when they are not around.

So in comparison the product might score low on return benefits but feature are still not available in other products.

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Manshu May 30, 2012 at 6:13 pm

Thanks for that response Jitendra, I certainly didn’t know about this point of view and it’s definitely good to know.

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Manikaran singal June 9, 2012 at 12:12 pm

Just to add what jitendra has said…
The feature where the policy continues even after the death/permanent disability of policyholder or parent as in this case is due to the inbuilt – Waiver of premium rider, which is available seperatly in many insurance plans. One can add on this feature along with there insurance plan if they want, by paying some extra premium.
Even the feature of Getting annual/ Monthly payments from insurance company which they call as education benefit feature , is due to the Income benefit rider attached to child plans. Some policies has made these riders optional to reduce the overall costs .

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Himanshu Bansal May 26, 2012 at 5:49 pm

Manshu, can you suggest me some good (not best :-)) investment options? You mentioned investment of 1011 at 12% rate yielding 10 lakh in 20 years. However, there are so many options that I always get confused.

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Manshu May 30, 2012 at 5:26 am

Tax free bonds are a good option, so are balanced funds, then there are FMPs that come out from time to time and have yielded well. Just some of the things that come to mind.

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Vijay May 26, 2012 at 10:46 pm

applicable to so called ‘Pension’ plans too!

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Manshu May 30, 2012 at 5:23 am

Good to see your comment after a long while Vijay!

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bemoneyaware May 30, 2012 at 10:33 am

Rightly said that you don’t need to buy children’s plan to invest for your children. Infact in India
1. Most of us plan to leave what we have for our children.
2, As a parent I want to give my child the best I can afford (and at times what I didn’t get when I was growing up !)

Investing in an insurance plan for Kids do not make sense as kids do not have any financial contribution. But we invest in endowment plans where the premium is waived off on death of the parent.

With changing circumstances – high cost of education, parents planning to stay alone till need requires them to be with parents – perceptions are changing. I have read people should let kids take education loan for higher studies(esp. post graduation) and save money for their retirement.

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Manshu May 30, 2012 at 6:15 pm

My own view is that parents should not struggle too much to pay for children’s post graduation at least. Most of them will get excellent jobs after finishing studies and they can then repay the loan. They would be at the start of their career while parents nearing towards the end so it is easier for the child to take this loan liability rather than empty up parent’s purses.

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Deepesh August 28, 2012 at 1:26 pm

Dear Manshu,
I am a kind of person who do lots of research before executing any plan (as small as getting a new mobile phone) which many of my friends think is being paranoid. I have read your blog and found many tips but your comment/ veiw expressed on May 30, 2012 about higher education load actually gave a booster dose to my own perception. Now I am really very clear about what I want to do and how…you guys have no idea how much you are helping (direct & or indirectly) to many silent readers or observers! Thansk Manshu and other for your views and comment!

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ankm83 June 6, 2012 at 12:06 am

Although child plan are marketing strategies followed by fund houses, they could be looked at as a disciplined approach to investing. Ofcourse our savvy investors who are well verse with the markets, need not give in for such lans

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ulip September 20, 2012 at 4:11 pm

what is the children plan and what is the investment plan.please explain me

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vaibhav Dadhich January 18, 2013 at 11:56 am

Hi Manshu,

how about investing annual amount in FD for five years and continuing doing that for 10-15 years …this way money is also multiplied after 5years.

what say ??

Regards,
Vaibhav

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