Several investment options are available for saving toward various financial objectives, such as children’s education, marriage, property ownership, etc. Unit Linked Insurance Plans (ULIPs), endowment insurance plans, fixed deposits, etc., are a few conventional investment options. Mutual funds have been more widely available as an investment choice as the financial markets have developed. In this post, we’ll talk about kid plans and child funds and how they differ.
Meaning of Child Plan
A kid plan is a specially designed insurance and investment program that aids in securing the future of the child. The kid plan consists of two parts: investments and insurance. When a tragic event like the death of a parent occurs, the kid is protected by the insurance component, which provides a set yearly payment in such cases. The investing component builds up capital to aid with the child’s financial requirements. With the help of this life insurance policy, the kid is guaranteed financial security even if something unfortunate occurs to the parents. A kid insurance policy gives life protection and the flexibility of paying at key junctures in a child’s development. Additionally, these plans are created with the knowledge that life is unpredictable. Therefore, a kid plan aids in creating a corpus to aid parents in managing future costs, such as their children’s schooling. The corpus can also be employed in cases like parents passing away unexpectedly.
There are various types of Child Plans available, and these are discussed below:
1. Child Endowment Plan:
These are conventional insurance plans, which combine savings with insurance. These investments offer set returns and no risk. In other words, the premium payment is invested in debt instruments, and the corporation chooses which debt instruments to use.
2. Child ULIPs:
A ULIP plan combines investing and protection. Because the investment is made in market-linked securities, it comes with inherent risks. In other words, according to the policyholder’s preference, a portion of the premium payment is invested in equity or debt securities.
How does Child Plan work?
There are several programs offered by various organizations on the market. The investor should know the precise amount needed to achieve their financial objective before choosing a plan after the term. They can thus determine the actual amounts insured or the amount of insurance coverage needed based on this. The investor must apply to get the premium depending on the insured amount. Based on this, the investor might select the sort of policy to invest in.
The two types of insurance are child plan ULIPs and child endowment plans, as was already explained. In contrast to the endowment plan, which the corporation controls, the ULIP plan gives investors the freedom to choose the instruments they want to put their money (premium). After the plan is finalised, the investor can pay the premium in one single sum or over time. When the first premium payment is made, the policy officially begins once the payment frequency has been chosen. The kid also becomes the policy’s nominee. However, if the policyholder (parent) passes away, the firm will pay the kid (nominee) a portion of the maturity amount annually until maturity. The youngster will be better able to manage their costs thanks to this. Additionally, any posthumous premiums must be waived. When the kid reaches adulthood, the promised amount is given to them.
On the other hand, if the parent lives longer than the policy term, the kid receives the sum promised after the policy period. Parents may also take a partial withdrawal from the corpus in an emergency. A kid plan ensures the family’s financial security so that the parents may focus on other areas of their child’s growth and development.
Meaning of Child Fund
A child fund, often known as a children’s mutual fund, is an open-ended mutual fund program that can be used to invest for objectives particular to kids. The growing cost of school and other necessities has made these funds a popular investment choice. Parents or legal guardians can invest in this fund on behalf of their children. The money saved can be used for anything related to children, such as paying for their schooling, getting married, moving, etc.
The minimum lock-in term for child funds is five years, or until the kid is eighteen, whichever comes first. A kid fund makes investments in debt and equity portfolios. A portfolio is an equity mutual fund if it invests 60% of its capital in equity securities. A debt mutual fund is one whose portfolio invests 60% of its capital in debt securities. Therefore, investors might pick more equity or higher debt based on their knowledge of risk and time horizon.
The main goal of this fund is to establish a source of funding for children’s essential expenses. This fund is an alternative to long-term investment choices because investors are prohibited from early withdrawals due to the fund’s steep exit fees. If an investor chooses to sell the fund before the stipulated five-year period, most fund companies impose a 4 percent penalty.
Additionally, under Section 80C of the Income Tax Act of 1961, parents who invest in these plans on behalf of their kids are eligible for a tax exemption of up to INR 1.5 lakhs. Additionally, interest earned through kid plans is tax-free. Taxes are, however, assessed on the maturity amount.
Who Should All Invest?
If you wish to invest in a way that will ensure your child’s financial future, consider using child funds. It offers tax advantages, assures wealth building, and imposes severe penalties on early withdrawals, discouraging investors from taking their money out of the fund. Additionally, personalised investing strategies assist parents in building a sizeable corpus. This fund is especially appropriate for parents who want to save money on taxes as one of their financial objectives.
The kid plan allows portfolio customization, allowing the investor to select between stock and debt. Due to the long-term nature of investing, it also helps investors develop discipline. Additionally, the authority is transferred to the child when they are 18 years old, giving them a choice in how they spend the money. To access the money, they must complete the KYC process. This fund must amass a sizeable capital to assist youngsters in developing their professions.
Which is a Better Investment Option, a Child Plan or Fund?
Both the kid plan and the child fund have advantages and restrictions. The investor’s financial goals and time horizon are the only factors that may be used to decide between the two. For instance, a kid fund is more suited if you need money in 5 or 6 years because child insurance policies have a lengthy maturity term. Additionally, a child fund’s shorter lock-in term of 5 years encourages investors to build up a corpus to support the kid’s requirements. Additionally, people with a solid understanding of risk and bear market volatility might invest in a portfolio emphasising stocks.
Under Section 80C of the Income Tax Act of 1961, both programs allow investors to save up to Rs. 1.5 lakh in taxes when making investments. Additionally, child insurance plans offer Section 10 tax-free maturity benefits, which are extra advantages of maturity (10D). Contrarily, child mutual funds are subject to capital gains tax according to the regulations for debt or equity taxes.
In addition, choosing a kid plan or child fund is not required to save for children’s financial objectives. You may always invest with a specific purpose by locating inexpensive mutual funds. There is protection in the form of a term insurance policy that will assist in meeting the child’s financial needs while you are away. You may always visit a financial planner to help you prepare for your financial objectives and make an educated choice.
Children and their future are something every parent will be concerned about. And it is duly important to ensure their future and the resources for getting what they want to live good and achieve good.
This article is to provide you with a basic idea about how you can plan for the future of your kid and widen it so that all crucial points are included in that.
