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best child plan
best child plan

Introduction

Parents want to give their child the best living, the best education and the best health care. But taking care of a child requires parents to have deep pockets. Hence, it is always better for parents to devise a financial plan to secure their child’s future. In this article, we have covered child plans, its importance and best child investment plans in India in detail.

What is a child plan?

A child plan is a financial plan to secure a child’s future. Parents or guardians invest in them for their child’s bright future. A child investment plan is the one that helps parents invest now for their child’s well-being in the future. Also, this plan is used for a child’s educational expenses, marriage or for their health.

A child investment plan can be an insurance plus investment plan or pure investment plans. Both types of plans require regular disciplined investments to create a corpus amount. However, in an insurance plus investment plan, a parent pays the premium amount. While in an investment plan, the same is called the SIP amount.

Investing in a child’s future is very important. It acts as a safety net of a child’s future. Also, it reduces the burden of parents as they start investing in small amounts right from an early age of the child. In the case of uncertainties, like loss of job of parents or the death of the parents. The investment in these plans will provide financial assistance to the child.

Investing a separate amount for the child will also help parents. They can fulfil their life goals without compromising on anything. By securing a child’s future, a parent need not liquidate any of the other investments which are set aside for other life goals.

Some of the child plans in the market provide tax benefits upon investment. However, the returns can be taxable as per the provisions of Income Tax Act.

Best Child Investment Options

Every parent wishes only the best for their children. And, to give the best, as a parent one needs to start planning for things in advance. With proper planning and investing, one can give their child everything that they dreamt off. While there are a lot of types of child plans available in the market, here are some of the best ones.

Best Child Investment Plans in India to invest in 2020 are:

Systematic Investment Plans (SIP)

Systematic Investment Plan allows small and periodical investments into mutual funds. Investing through SIPs will automatically deduct money from the bank savings account. The date and investment amount are decided while starting mutual fund investments. Since investments for a child’s future is a long term financial goal, one can consider investing in mutual funds. Be it for education or marriage, one can create a fund for their child.

Choosing goal based investments will help in creating a corpus for the child. Goal-based investing is a tool that automatically calculates the required corpus at the end of a predefined time. Over the years, mutual funds have given significant returns. Investing through SIPs helps investors in averaging out the volatility in the long term. Also, mutual funds generate inflation beating returns. Therefore, SIP investments will help in generating a good corpus for one’s child. One can always opt for partial withdrawals as mutual funds do not have any lock in.

Additionally, one can use the SIP calculator to estimate returns from mutual fund investments.

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana is a scheme under the “Beti Bachao – Beti Padhao” campaign. The savings scheme was launched by the government to secure a girl child’s future. It guarantees returns, and the current interest rate is 7.6%. The SSY account can be opened in any post office or designated public and private sector banks. A family can open a maximum of two SSY accounts. However, in the case of twins, three accounts are permitted.

To open the account, the girl must be at least ten years old or younger. The lock in period for the scheme is till the girl child reaches 21 years. The minimum investment amount is INR 250 and maximum (lump sum) is INR 1,50,000 for a year. The maturity benefit can be used only for the purpose of the child’s higher education or marriage. Also, investment into SSY scheme is eligible for tax deduction up to INR 1,50,000 per annum under Section 80C of the Income Tax Act.

Partial withdrawals are allowed at the age of 18. 50% of the money can be withdrawn for the higher education of the girl child. Premature withdrawal is allowed if the girl child unfortunately dies or needs money for treating any critical illnesses.

Additionally, one can use the SSY calculator to estimate returns from Sukanya Samriddhi Yojana scheme.

Importance of investing in a child plan

Secure your child’s future

Investing in a child plan can help parents secure their child’s future. In child plans, the child will be the beneficiary or the nominee. Hence they are entitled to the entire sum of money. Even during uncertain situations, the child can use this money to study or get married or meet basic financial expenses.

Creating a corpus

By investing a small amount from a child’s early stages of life, a parent can accumulate huge corpus. By the time they want to go for higher education or get married, the investments made over the years will help them to fulfil their goals. A parent need not worry about taking a loan or liquidate other investments to fulfil their child’s dream.

Regular Savings

Investing a small amount regularly will inculcate a habit of saving among the parents. It also reduces the burden on parents when their child wants to go for higher education or get married. By investing small amounts for their child, a parent can plan his/her expenses and investments properly. They can allocate money for other life goals accordingly without having to compromise on anything.

Things to keep in mind before investing

Investment Goal

Having an investment goal will help in deciding on a monetary value. This is the starting point to decide how much one should save to protect their child’s future. The goal can be anything, an education fund, marriage fund, head start to the child future, etc. Selecting the investments that best fit the goal is very important. Therefore, having a goal and investing will motivate one to keep investing to achieve the goal.

Tenure

Tenure plays a vital role in generating returns. For all market related investments, longer durations help in generating significant returns. Additionally, child plans require long investment tenure to generate higher returns that will help in reaching the goal. Therefore, investors should consider having longer tenures for their child’s future. Small investments done in a disciplined manner for the long term will help in securing the child’s future.

Returns

To enjoy significant returns, one has to stay invested for long durations. Predominantly all the child plans have longer durations. For example, Sukanya Samriddhi Yojana earns guaranteed returns and has a lock in period till the girl child reaches the age of 21 years. Historically, mutual fund investments have generated significant returns. Also, mutual funds are suitable for the long term horizon as it helps in averaging out the market volatility. While it is important to save for the child’s future, it is also important to invest in an avenue that helps in earning significant returns. Mutual fund returns are based on fund performance. While investing in them, past performance of the fund has to be considered to evaluate it.

Expenses

Mutual fund investments and Unit Linked Plans have certain expenses associated with them. For example, ULIPs have premium allocation charges, policy administration charges, mortality charges, fund management charges and surrender charges. All these expenses are subtracted from the annual premium. Therefore, these expenses make ULIPs costlier than mutual funds. The fund house charges a certain amount for its fund management. It is known as the expense ratio. As an investor, one should aim at investing in options with a lower expense to be able to generate greater returns. Therefore, it is advisable to invest in funds with lower expense ratio.

Risk

All investments come with a certain amount of risk. For example, mutual funds and ULIPs invest in equity markets. Equity markets are subject to market volatility. However, with a long term investment tenure, one can average out the market volatility. Therefore, investors should aim to have a longer investment duration for their child’s goal. This way, one can generate significant returns by averaging out the volatility. 

Taxation

Different child plans have varying taxation rules. For example, investments up to INR 1,50,000 in Sukanya Samrridhi Yojana SSY are tax deductible as per the Section 80C of the Income Tax Act. Also, the returns are entirely tax free. Similarly, Unit Linked Insurance Plan investments up to INR 1,50,000 in a year are tax deductible under Section 80C.

On the other hand, gains on mutual fund investments are subject to taxation. The taxation is different for equity mutual funds and debt mutual funds. For equity mutual funds, short term capital gains (investment tenure less than one year) are taxable at 15%. Long term capital gains (investment tenure more than one year), gains above INR 1,00,000 are taxable at 10%.

For debt mutual funds, short term capital gains (investment tenure less than three years) are taxable as per the investor’s income tax slab rate. Long term capital gains (investment tenure more than three years), the gains are taxable at 20% with indexation benefit and 10% without indexation benefit.

Additionally, one can use the Income Tax calculator to determine the amount of tax liability and the possible investment options to reduce the tax outflow.

Why choose Scripbox’s Child dream plan?

Scripbox offers investors two plans to protect the child’s future. Following are the child plans by Scripbox:

  • Child’s education plan
  • Child head start plan

Child’s education plan

Scripbox’s child education plan helps parents invest in the ever rising education fee. Children’s education can be a costly affair. Planning in advance will help in overcoming the burden of high university fees. Scripbox allows investors to customise the plan based on college preference. The college fee varies based on the type of colleges. Scripbox offers plans for government colleges, private colleges, premier private colleges and for education abroad. Based on the college preference, one can personalise this saving plan and invest in their child’s education.

Child head start plan

The child head start plan helps in creating a wealth of one crore by the age of either 18 years or 21 years. Parents willing to give their child INR 1 crore advantage can invest through this plan. Everyone wants to give only the best for their child. Therefore, Scripbox’s child head start plan will help in creating a wealth of INR 1 crore to set the child up for success.

Scripbox’s algorithm calculates the amount of monthly investment based on the inputs given by the parents. All that one has to input is the child’s age and when do they want INR 1 crore (when the child is 18 years or 21 years old). Upon calculating the monthly investment amount, the algorithm also suggests the best funds to invest.

Both the plans help investors to plan for their child’s future. These plans are long term investment plans that invest across different mutual funds (equity fund and debt fund). The long investment tenure helps investors generate significant, and inflation beating returns. Though these investments are subject to volatility, the long investment duration helps in averaging it out. Upon investing in a plan, one can easily track its progress. Additionally, Scripbox reviews the portfolio on a regular basis and suggests necessary alterations to keep up with the goal progress.

What are Unit Linked Insurance Plans (ULIP)?

A Unit Linked Insurance Plan is an insurance cum investment product. A life insurance company offers a Unit Linked Insurance Plan. ULIPs are long term investments options. A policyholder can pay an annual premium or a monthly premium. ULIPs provide insurance to the policyholder as well as an option to invest part of the investments in equity markets. On the death of the insured parent, the sum assured is given to the nominee child. Also, all future payments are waived off. Additionally, a lump sum amount is paid on maturity to ensure that the child’s future dreams are not compromised.

What documents do I need for a child plan?

For investing in any child plan, the parents have to the following documents:

  • Proof of age: A proof of a child’s age is important. One can use a birth certificate or passport for the same.
  • Proof of address: The address proof of address has to be given. Aadhaar card, passport, or electricity bills can be used for the same.
  • Proof of identity: Aadhar card is one example of proof of identity.
  • Proof of income: The parent has to provide proof of income. This shows that the parent is financially stable to pay the premiums of the policy.

How is a beneficiary different from a nominee?

A beneficiary is a person who has an interest in the life of the policyholder or investor. They are usually legal hires to the investor. Whereas, a nominee is a person who is appointed by the investor to take care of their finances in case of death of the investor. In most cases, a nominee and a beneficiary can be the same.

How to invest through Scripbox?

Investing in the child’s future is easy with Scripbox. All that one has to do is create an account on Scripbox, choose a saving plan and set up their investments.

Following are the documents required for investing through Scripbox:

  • Photograph
  • Pan Card
  • Address proof (Aadhaar Card (Both Front & Back)/Driving License/Passport/Voter ID Card)
  • Identity proof (Pan Card, Aadhaar Card, Driving License/Passport/Voter ID Card)
  • Saving account details (including saving account number, branch and IFSC code)

Also, investing through Scripbox is completely online and paperless. Following are the advantages of investing through Scripbox:

  • Setting the right financial goal: Scripbox helps in estimating the amount one needs for their goals, upon taking inflation into consideration.
  • Create a customised financial plan: Scripbox uses advanced tools to create a personalised financial plan for its investors. The plan will be based on the current costs, price increases, current savings and potential increase in income.
  • Make the right investments: Scripbox provides the right mix of investments (debt fund and equity fund) that are suitable for the financial goals and personal preferences.
  • Regular monitoring: Scripbox regularly monitors the portfolio and recommends changes. It aims to keep the investment portfolio aligned to the changing market dynamics.
  • Track the goal progress: Through the Scripbox account, an investor can track the progress of their goal. One can quickly know how long they have to reach their goal.

Frequently Asked Questions

Is there any age limit for a child plan?

The age limit for child plans depends on the type of plan chosen. For mutual funds, a parent can invest on behalf of the minor child. For Sukanya Samriddhi Yojana (SSY), a parent can invest towards a girl child before she turns the age of 10. The maximum entry age for SSY is 10. For ULIPs, a parent can invest in ULIPs for their minor child up to the age of 18 only. This is the maximum entry age for these plans.

Which policy is the best for a child’s plan?

There are multiple types of child plans available in the market. The choice of the policy depends on the nature of the policy, parents and the child. A parent can invest in SSY for only a girl child. However, ULIPs and mutual funds do have such restrictions. While SSY comes with a lock in, there is no such thing for mutual funds. As parents, you have to understand your requirements and check the finances before committing to a child plan to secure your child’s future.

Are there any tax benefits on child plans?

Yes, most of the child plans have tax benefits. Investors looking for tax savings can invest in SSY and ULIP plans. These plans qualify for tax deduction under Section 80C of the Income Tax Act. Additionally, the maturity benefit of child plans is tax free under Section 10D of the Income Tax Act.

Published on September 8, 2020