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Mutual funds versus ULIPs: How to plan your child's future

The most important step in ULIPs is selecting suitable fund options. If you have a long-term view, you can select equity funds and reduce equity exposure as you get closer to your child's education goal

Mutual funds versus ULIPs: How to plan your child's future

As you get serious about listing your financial goals, your children's future comes top of your mind. There are plenty of child-focussed plans available in the market either in the mutual fund or in the insurance space. You can also explore regular investment options to accumulate funds for your child's future. We give a lowdown on what may work for you:

New-age child ULIP plans

When you plan your children's future you do take into account the unpleasant scenario of you not being around. Having an investment plan that stays intact even in your absence is a sensible approach, more so, if you are a sole earning member in the family. The advantage of new-age child ULIP plans is its waiver of premium option. The option ensures that even after the death of the policyholder, the child plan remains in force for the remaining part of the policy term. The policy premium is paid by the insurer and at the end of the policy term, the maturity amount is paid to the child. 

"Child ULIP has triple benefit - First, on death of the parent, the family gets death benefit for daily expenses. Second, the family gets regular monthly income to fund child's school fees and third, since future premiums are being paid by the insurer, the final maturity amount is also paid," says Vivek Jain, Head - Investment Business, Policybazaar.com.

ULIPs have earned a bad reputation in the past due to opaque and high-cost structure. However, new-age ULIPs are of low-cost and comparable to mutual funds. They don't have premium allocation or policy administration charges. The fund management cost you do pay, but it is capped at 1.35 per cent. Online ULIPs also let you have unlimited 'switch' options. Besides, some insurers return the mortality charges along with the maturity amount if you survive the policy period.

The most important step in ULIPs is selecting suitable fund options. If you have a long-term view, you can select equity funds and reduce equity exposure as you get closer to your child's education goal. If you are not savvy enough to take such calls on your own, you can leave that to the fund manager.

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Child focussed MFs

Child focussed MFs are not different from other MFs. The only difference lies in the fact that it comes with a lock-in period so that the investor stays committed for a long-term. For example, ICICI Prudential Child Care Fund - Gift Plan comes with a lock-in period of five years or till the child attains the age of maturity (whichever is earlier) "The scheme is well-diversified and invests across market capitalisation with equity allocation in the range of 65-100 per cent. The allocation is decided on a tactical basis rather than any predefined ratio. Also, the scheme has the flexibility of moving up to 35 per cent in the debt securities if the risk-reward ratio is favourable to such allocation. As of June 2020, the equity allocation stands at 66.34 per cent and debt allocation is 33.66 per cent," says Chintan Haria, Head - Product Development & Strategy, ICICI Prudential AMC.

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Choosing between the two - If you need funds for your child right after five or six years, child-focussed mutual funds will work for you as ULIPs come with a long maturity period. Otherwise, ULIPs will score over MFs as not only former comes with tax deduction on premium paid under section 80-C of Income Tax Act, 1961, but also maturity benefit being tax-free under Section 10(10D). So far as MFs are concerned, they attract long-term capital gains tax at 10 per cent.

Besides, you don't have to necessarily go for child-focussed MF. If you are a financial savvy person or can hire a financial planner, you can start your goal-based investment by identifying low-cost mutual funds and for protection, you can buy a term plan with substantial coverage, which will secure your child's financial needs in your absence. "We are not fans of solution-focused mutual funds. Having a goal, be it kids' education or marriage and then using low-cost funds achieves the same objective with better outcomes for the investor. The goal also acts as a deterrent that the money being saved there will not be arbitrarily used for other purchases. We find that to be a much better construct for investors then looking at high expense ratio solution-focused mutual funds," says Gaurav Rastogi, founder & CEO, Kuvera.

Other suitable options

For your girl child, you can consider Sukanya Samriddhi Yojana. You can also open a PPF account on your child's name - be it a girl or a boy. One of the parents can act as a guardian and when the child attains the age of 18, the account turns major from a minor. Note that if you already have a PPF account in your name, the maximum amount invested in your account including the child's account cannot go beyond Rs 1.5 lakh per year.

Ultimately, either a combination of a low-cost mutual fund along with a term plan is the best approach to secure your child's future or if the waiver of death premium matters to you, go with new-age ULIPs. If you do not want equity exposure, consider small savings schemes like Sukanya Samriddhi or PPF.

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