November 14th is Children’s Day and this is as good a time as any to think about how parents can best secure their child's future.
In an interview to CNBC-TV18, Abhijit Bhave, CEO at Karvy Wealth; Harsh Roongta, a PF expert and Shweta Agarwal of Ideal Insurance Brokers discussed what are the best ways to save up for your children.
They also discussed how can you meet higher education expenses, and what are the right insurance products to make sure your kids are well taken care of incase anything were to happen to you.
Watch the video here:
This is as good a time as anyone to think about how parents can secure their child’s future. What is the best way to save up for him or her whether it is education, whether it is wedding or any other expenses, what are the right insurance products to make sure that your kids are well taken care of just in case something happens to you. This is a subject that is close to our heart and specifically all the parents out there and it can be a little more confusing than what meets the eye. You have these products called child plans, you have products that the mutual fund is offering, that the insurance world is offering and as a parent, you are always wondering if you are doing the right thing or doing enough to secure child's future? So, let us get some opening thoughts to begin with?
Bhave: When I was a child, I asked my parents how much do you love me. They said you will only come to know when you become a parent. For anybody child’s future is the biggest dream possible in life and to convert that into a financial goal and to create a perfect financial plan becomes a very important thing for every parent.
Compared to the yesteryears, it has become very complicated now in terms of how much to save. Because no longer people want to make their children doctors and engineers, there is a lot of education that they can have in India and overseas. There are other costs like tuition fees and students housing so they have to create the right corpus.
The options can be many, earlier people used to put money in property and in gold. Now they put money in financial assets. So you can start by saying that pure debt is a strict no-no because the returns are very low. When you look at equity, you start by saying let me look at mutual funds and let me start doing a simple systematic investment plan. The point is once you have the amount in view, once you know the number of years and once you know how much you have to save then you look at that. Then you add an element of protection because if something happens to the parent then what you do with the life of the parent and then look at the combination of investment and protection.
That sounds very simple but as I said it is easier said than done. Let us take up the first point first. Knowing what is this corpus that you are trying to build that itself can be a daunting task because it might just seem like a Rs 2,000-3,000 systematic investment plan (SIP) today but is it really going to be enough?
Roongta: How much should I invest every month so that whatever dream that I have for my child will be fulfilled? For doing that you really need – I mean you have calculators and things like that – is to decide that if your child was to get educated today. I am assuming primarily we are talking of education that if my child was to be educated today and you have no clue of a child who is just 2-3 years or five years old. Nobody has a clue what is he going to do.
But lets us assume he would go for a professional course. What would it cost and depending on your means, you could estimate that cost in India, which would be slightly different if it happens overseas. Overseas is euphuism for the US, basically at least in India. So you do that, take a certain inflation into account and you arrive at the number that you need to invest.
Let us try to put this number out there as arbitrary as it might be but if you are talking about starting a plan today to create a corpus let us say 18-19 or maybe 20 years down the line for a child that has just born today for India what would that lump sum be that you would work with and then for the US what is the lump sum?
Roongta: India is no longer as cheap as it used to be, but if you are looking at under graduation in India, a professional course again there are so many things assuming that he/she would get through in competitive exams. Say may be Rs 10-15 lakhs a year in today’s market, into 4 or 5 so that would roughly be Rs 40-60 lakhs.
Just for education in India?
Roongta: That is right. Hold that thought about just. The US on the other hand, you have to assume without scholarships. I would say what Rs 40-45 lakhs a year including living expenses, multiplied by the number of years – the other important thing people tend to think that if I plan for my child’s education that is enough. That is not enough. Because guess what when the times comes for the child’s education, if you have not planned for your retirement, if you have not planned for other things those needs are going to come in between and there you cannot plan in isolation for your child. You have to have a comprehensive plan. Lot of people forget that.
That is a whole thing because there are so many different things that are vying for the same pie of domestic savings, it is retirement, it is immediate needs and of course its long term goals like planning a child’s future. Now here is where it gets interesting. The market place is littered with products and you have these fancy advertisements, which urge the parent to save more and invest more. You thoughts on the subject?
Agarwal: Every insurer is now coming out with a child plan because a child's future is dear to a parent’s heart. Every child is like the most important being in the parent’s life. So, it is important that they do whatever best they can, not only for education, they want to plan for their marriage, they want to plan for their comfortable living, they want to plan also for suppose they want to set up a business.
So, keeping in mind all these the insurance companies have come up with plans, which acts as an investment, so they not only insure the child’s future, they also finance the major turning points in their life as we just discussed. So this is where insurance differs. It is not only into investment it also insures your child’s future by covering the life of the parents. Suppose you are investing in a mutual fund or equities but what after two years, suddenly one of the parent dies so who is to pay the continuing investment this is where insurance comes.
They have a rider call waiver of premium so in case something happens to the parent, the premium payments still continues by the insurer itself. So, the burden of continuing the investment does not fall on the child or the family.
Let us just take it one step at a time and look at products starting first with what the mutual funds are offering. We will keep insurance away for a bit right now. Now interestingly as I was trying to do some homework, I realised that even asset management companies are offering so called ‘child products’. I don’t know how this works, if you could explain are these just plain vanilla mutual funds which are just called ‘child funds’ are there any additional benefits or features?
Bhave: These are mutual funds plus something. For example, there is HDFC Children’s Gift Fund Plan and there is ICIC Prudential Child Care fund, now both these are hybrid funds so they have a component of debt and equity. The difference is that there is a five year lock-in, the difference is that the money can be taken out either at the end of five years or when the child becomes 18 whichever comes later. The difference is there is a small insurance cover, which is just an accident cover.
This covers who?
Bhave: The parent, but I wouldn’t recommend buying this as a child plan. You can as well buy a normal hybrid fund which will serve the same purpose but in my view, if you have a long-term goal it is better to buy a pure equity fund and later as the goal comes nearby, you convert to debt.
On the mutual funds which have the child tag to them what is your thought?
Roongta: This child tag whether attached to a mutual fund or whether attached to an insurance company, these are marketing jargons. I think the mutual funds have come up with this as half-hearted sort of riposte to the plethora of child plans that are available from the insurance industry. My advice, strong advice to every parent if a plan advertises itself as a ‘child plan’, it is not a right plan. Just keep away. I am absolutely clear.
You were making the point that these products probably are not worth a while. Why would you say that because the counter view that I am getting from the other guest is that at least child plans inculcate a level of discipline. It is goal oriented, that money cannot be touched or utilised for any other purpose so what would you say to that?
Roongta: Obviously, like any other argument, there is a point on both sides but I think if you are using discipline to support, at least on the insurance side, the mutual funds are not so bad. The insurance side clearly, I mean you are talking of some 3-4 percent returns. Because you don’t trust yourself, because you are too disciplined, you want to lock-in your money at 4 percent for 20 years – I leave that decision to the parents.
That is a strong argument and one must keep it in mind while coming to the choice of products but that also brings us to what the insurance industry offers. Let me bring this back to you, just break it down, simplify it for us when we are talking about child plans offered by insurance companies are these ULIPs (unit linked insurance plans) or are these traditional plans what are the rates of return?
Agarwal: Child plans do come in options. You can have ULIP, which is linked to equity or debt market and then there are traditional plans like endowment plans, which depends on the time invested there.
So, depending on your needs, if you are a little risk averse then you should go for endowment plans but if you are ready to take the risk then you can go for ULIP. It depends from person to person, its unique needs of the person.
However, as a Harsh Roongta said the returns are very low, yes they are low. They range from somewhere around 3-4 percent. But when we look at the advantages in the long-term, they outweigh the higher cost, the higher premiums that we are paying. The biggest worry of a parent is the rising cost of education followed by the lack of discipline, not saving enough, not having enough knowledge about the plans available in the market so how do you counter these. Also, according to the National Crime Bureau statistics, an Indian dies in an accident approximately every 90 seconds. So, how do you cope up with these?
So this is where insurance comes to be it a ULIP plan, be it a money back plan, be it a traditional endowment plan. These will cover your risk of uncertainty of future. Death is the only certain thing and time of death is the most uncertain thing in life and insurance covers both of these.
Q: I take your point on that but let me just ask you quick counter since you have been studding these products for a long time now. As you mentioned if it is a traditional plan, endowment plan then the return is going to be a mere 3-4 percent. ULIPs, in your experience, over long periods of time child plans, which are market linked what kind of returns are they generating?
Agarwal: They may generate over 6-7 percent but again it depends on the market so right now if you are talking about the market is down. So you will not get that much of returns. But, otherwise, ULIP plan still give you more than 6 percent on an average.
Now another thought that strike me as a positive factor of taking a child plan is this waiver of premium and that is a solid argument. Because yes till the time parent is systematically investing in a mutual fund that is fine. God forbid if there is an eventuality, there goes that investment stream whereas if you have a child plan then typically even in the event of the parents’ death the future premiums get paid off. Does the policy continue as is in its form, what happens to the benefits, the payouts at the age of 20-25 years?
Bhave: Completely as is. So, I will give you an example, I have a son who is 10 years old and my wife is an ex-banker. I will buy mutual funds and term plan because I know if something happens to me, my wife will know where to invest the money. But I had a cousins whose husband passed away unfortunately and when she got the term plan money, her uncle came aside discussing should I put the money in property, should I put the money in gold. So, if I am a father and I am trying to create a plan for my son or my daughter, I would want to have complete peace of mind and lock my financial goals. That is the major advantage of a child plan. ULIP linked plans would typically give returns of 8 percent plus as Shweta Agarwal was saying as the markets do well and for a particular profile where you are not sure what will happen to the term plan money in case of a death, child plan makes perfect sense.
Does this cut any ice with you, the fact that at least future premiums are waived off, so that death uncertainty gets taken care of?
Roongta: I think one thing is very clear. Nobody can argue against insurance. So just doing investments is not enough. That is like Sachin Tendulkar going out to bat without pads. Insurance is an absolute must, I have never argued against insurance, all that I am saying is don’t mix it up.
Coming to the waiver – again what is a waiver? What waiver does is that it pays the premium for you into that policy. So that it matures at the normal time. If you have taken a regular insurance and now incidentally there are mutual fund products that offer life insurance for free, genuinely for free.
However, coming back, instead of a waiver, if the money comes, whatever is the amount that you had envisaged, if you have taken a term cover that money would come. Suppose you need it after 10 years and unfortunately you die after two years, the money comes after two years.
Sure, there is an argument that money might be squandered but that is where what I mentioned that you cannot – one is knowledge, you can never plan in isolation. What is the use of being assured of your child’s future but other things if they are not being planned properly? So comprehensively if you have planned, I don’t think this is a problem at all. That is at least my view.
But for the benefit of our viewers who are interested in insurance offerings, child plans which are offered by insurance companies – let us just get in some examples as well. Then the sort of products that you would perhaps keep in mind or recommend, I don’t know, these traditional plans, the endowment policies where even Shweta Agarwal mentioned, 3-4 percent, I don’t know if that makes sense or otherwise ULIPs, if you could just name any products that you like?
Bhave: We wouldn’t recommend anything to an investor, which is not linked to the risk profile. Even today, there are certain investors who want zero risk and that is the only place where we will go with the endowment plan but if you look at unit linked plan with a waiver of premium, there are two good plans. There is ICICI Prudential Smart Kid Plan and there is Aegon Life Maximize Option 2 where they have a clear waiver of premium. That is what we would recommend.
Typically what are the kind of sum assured that these plans offer?
Bhave: That is 10 times of the premium that you pay but you can take a higher cover also. So it is completely left to the individual.
Same question to you, some thoughts, products that you are recommending to your clients?
Agarwal: People somehow prefer LIC even today. So if we go by LIC, Jeevan Tarun is a good policy. It is a money back policy so you can take the policy as soon as the child is 90 days old and there is no limit to the sum insured as high as you want. This starts paying once the child achieves 20 years of age and upto 25, you get some percentage of the sum insured and at maturity you get the entire amount.
If you take waiver of premium as the rider, you also get death benefit at the death of the parent. If you go to a private insurer, there are policies like ICICI Prudential Smart Kid Premier or Young Assure Plan. So Smart Kid Premier is a ULIP plan wherein you have a choice of investment in the funds available and you get equity linked returns.
Then there is Bajaj Allianz Young Assure Plan wherein again the parents have covered, in case something happens, the returns as per the endowment plan, the traditional plan.
These three are good plans and recommended from our side.
If you don’t want to opt for something called the ‘child plan’ then how do you construct the right mix, the right balance between insurance and a mutual funds, the investment part of it. That is an approach that you have been advocating – is it good enough to just have a comprehensive one crore term plan and the rest can be just mutual fund, how do you segregate these things out to ensure that your basic goals are met?
Roongta: I think segregate is the right word that you have used. Take your term plan separately, not just safeguarding for your child’s education, safeguarding for - as Abhijit Bhave mentioned - your retirement or your other needs. So that if you are not there, even then those needs will be met. That is separate. It should be de-linked from your investment. Now when you look at investments and now you are looking at for your child’s plan, now most people tend to have a dream that they would send their child overseas so they have a dollar exposure and I think that is where you should look at investing in mutual funds at least a portion of what goes for your child so that you get some element of cover against the rapid depreciation of the rupee. So you invest in mutual funds that in turn invest in foreign markets.
So you are talking about some of these US equity funds, US Bluechip Funds etc, you even have Greater China, emerging market, Asian Equity Funds.
Roongta: As I mentioned right at the beginning, in India, foreign education essentially means the US or at most the UK education. So effectively you should look at dollar exposure if that is your phrase.
Bhave: He used the word high networth individuals (HNIs), I know HNIs do watch your show and there is a liberalised remittance scheme of Reserve Bank of India (RBI), which allows investment of USD 250,000 per financial year per person and as he rightly said, we have a lot of people aspiring to send their children to the US for education and there are US funds – fund of funds – without insurance, which will invest in dollars for you.
In the last 40 years, if you look at rupee and dollar – dollar is appreciated by 4 percent per anum for the last 40 years on an average. So if you have a vehicle there where it will invest in local funds, there are funds by JP Morgan or by HSBC or by Fidelity and certain platforms actually have an option of without remitting the money back sending it as a fee for education.
So that is typically an HNI kind of a product but that is something I would also request your viewers to take a look at when they look at the segregation for funds for foreign education.
If you are not doing a child plan and if you are going to construct your own insurance metrics along with your financial planner then term plan, one crore, two crore, three crore or any other type of insurance policies, what would you recommend, what could go in?
Roongta: Instead of putting a figure, I think it should be a multiple of your income. So typically if you are between 30 and 40, it has to be a 15-20 multiple. As you grow older, the multiple will keep coming down although the income will go up, the multiple will keep coming down. So after your 40-45, maybe 8-10 times but till 45, I would say at least 15 times and if you are 35, it should be at least 20 times.
Any last thoughts, any tips, any advice you would like to leave our viewers with?
Bhave: I think it is a combination of investments and insurance and I think it is something that deserves a 100 percent attention and I would request every parent who loves their child to look at financial planning for child education as their top priority if they have not done it till now.
First Published: IST