It is the season of Christmas and children often pray to Santa Claus to give them different gifts. To keep the child’s beliefs alive many parent’s play Santa and shower their children with gifts that their hearts desire. But do the parents think long term when investing in a gift for their children?
Raising a child is no mean task. Besides the enormous responsibilities that come with a child, parents also need sufficient finances to fund their child’s future. Education today has become very expensive. Even when the child is in junior classes, the cost of education taxes parents’ pockets. Imagine what the cost would be when the child grows up and wants to pursue higher education?
Even by today’s standards, higher education is expensive. If you factor in the increasing inflation, which is prevalent in the field of education, the costs are expected to spiral even higher in the next decade or two. With such enormous costs, ready to strike parents in future, it becomes wise to invest towards the child’s future. That is why child planning features on the to-do list of many parents wherein they create a small fund for their child’s education and career needs in future. Have your clients also invested towards their child’s future?
If they haven’t, they should and you can help them in this task. Even if the child is young, starting a fund especially for the child’s future needs would be a wise step to take presently. Here are some reasons why –
- Power of compounding
Compounding returns mean getting returns on the returns which investors have already earned. When investors invest and earn a return on their investment, the return generated is added to their investment. Thereafter, any subsequent return is calculated on the invested amount plus the return already earned earlier. This is how compounding works. When investments are given a long investment period, compounding works wonders. It multiplies the investments manifold thereby creating a substantial corpus. So, if your clients start investing early, they can create a corpus which would be sufficient enough to meet the financial needs of their child when he/she grows up.
- Earmarking the investments
It is always advised to create an earmarked fund for the child’s future needs. When your clients plan their finances and build up a financial portfolio, they should identify their financial goals and then plan investments around them. Child planning is also one financial goal for which they should invest separately. This helps in mental accounting wherein your clients can monitor, review and assess the corpus that their child would need and then invest accordingly to build up the required corpus.
- Beating education inflation
As stated earlier, the cost of education is expected to increase in the future due to education inflation which is an inevitable menace. To beat the effect of this inflation and to create an inflation-proof corpus, your clients need to start investing for their child at the earliest.
How to invest for the child’s future
Now that you know why your clients need to invest for their child’s future, here are two popular ways in which they can plan for their child –
- Through a child insurance plan
A child insurance plan is a life insurance policy wherein either the parent or the child is insured. Since the child is a minor, the parent is the policyholder who pays the premiums for the plan. Child plans are the ideal tool for child planning because these plans have an inbuilt premium waiver rider. If the parent dies during the tenure of the plan, child plans remain unaffected. The future premiums are waived off and are paid by the insurance company itself. The plan runs undisturbed and the promised benefits are paid when the plan matures. Thus, child insurance plans ensure that a financial corpus is created for the child whether the parent is around or not. - Though mutual funds
Mutual funds are another popular investment avenues for creating a corpus for the child. There are different types of mutual fund schemes and your clients can choose a fund depending on their risk profile. However, for child planning, equity mutual funds make more sense. This is because the risks in equity funds minimize over a long term period and these funds give attractive returns. These returns ensure that your clients end up with a substantial corpus when their child matures and needs funds for higher education or marriage.
Things to consider – clubbing of income
Under life insurance plans, the plan benefits are completely tax-free under Section 10 (10D) of the Income Tax Act. Thus, any benefits received from the plan, by your client or by their child, would be tax-free in either of their hands.
In case of mutual funds, however, the case would be different. If your clients invest in a mutual fund scheme in their name, the returns from the scheme would be taxed in their hands. Even if they invest in a scheme in the name of their minor child, the returns generated from the mutual fund scheme would be clubbed with their income and taxed in their hands. This clubbing of income would be applicable till the child attains majority. Once the child is 18 years and above, the returns from the mutual fund scheme would be considered the child’s income and taxed in his/her hands.
Conclusion
This Christmas advise your clients to become the real Santa for their child and invest towards their child’s future. While small gifts and chocolates would fulfil the child’s short-term needs, investing in a child plan and a mutual fund scheme for the child’s future would secure the child’s financial future. So, your clients might shower their child with gifts this Christmas but they should not forget to plan for his/her future. You, as their financial advisor, should educate your clients and help them in creating a sound corpus for their child’s needs so that their child thanks them when the time comes.
