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Child Plan: Is that REALLY worth for your kids?

Malvika — Thu, 15 Sep 2011 10:15:11 +0000

I am reminded of a Tamil saying, “Experience what it is to build a house, and get a child married”, probably that is the reason why wise parents invest to meet the long term financial obligations like education and marriage cost of their children. In addition the rising inflation rate also calls for starting savings early in a child’s life. However it would be advisable to know, evaluate and compare various means of savings. This could also enlighten you about how “child plans” need not be the only method.

Disadvantages of a Readymade “Child Plan”

v “Child plans” with insurance resemble unit linked insurance plans, starting early in a child’s life and ending only when the child attains maturity. The amount of money invested in these plans is insignificant considering an in-built insurance component, and other charges like premium allocation charges that are the commission paid to distributors. This could lead to low return in the initial stages and additional losses on leaving before completion of the tenure.

v Most of the “Child plans” in the industry comes with a catchy name to capitalize the “Child sentiment” in us.

v We need a different medicine for a kid and adult. But do we necessarily need a different type of investment options for securing a kid’s future. Think.

Alternatives for Child Plan:

v It is to be noted that other investment products like Public Provident Fund, National Savings Certificate, National Savings Scheme, RBI bonds, post office deposits and instruments and mutual funds that serve the purpose of savings and increasing of capital value apply equally well to investment for a child’s future.

v Mutual funds are available in a wide range to satisfy all appetites for risks. In addition there are mutual funds that are designed for meeting long term financial obligations of children. One could also invest in funds with a right balance between debt and equity that promise better capital growth than child plans. It is also possible to go in for systematic investment plan that offers the opportunities of taking advantages of price differences and gaining in the long run.

v It is true that systematic investment plans or SIP help save entry cost and build a habit of regular savings for capital growth to meet children’s financial obligations. It is also possible to avail of tax benefits as such funds are taxed only on maturity and a major child’s income would be taxed separately. I am sure you would agree that this would help saving unnecessary expenses and cuts in investing in child plans.

v PPF or Public Provident Fund is also good as mutual funds, with opening a PPF account for a 20-year period in a child’s name helping to meet long time financial obligations of children. It has been stipulated that an annual investment of just Rs.70000 would leave you with almost Rs.32lac as a result of the compounding effect. It is difficult for a “child plan” with insurance component and upfront charges to offer you such a great return without taking much of risk.

An Ideal Mix:

Instead of going for a “Readymade Child Plan”, one can customize their Investment Plan for their child with a combination of Term insurance, PPF and equity diversified funds.
If tax saving is your motive one can consider ELSS funds instead of a regular equity fund.
It gives you similar tax benefit like a child plan. You get 80 C benefits for your investments. Also the returns are also tax free.
At the same time, the charges are very very minimum and negligible when compared to “readymade child plans”.
You can increase or decrease your contribution every year depending upon your financial situation.

So whenever, you think of child plan think of a customized investment plan for your kid’s future with a mix of 2 or 3 investment options instead of readymade product with a tag “Child Plan”. I am sure you would agree that readymade child plans prove to be not ideal instruments to save. The wisest line of thought would be a mix of diversified investments that gives good return with low charges.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Stable Monthly Income from Cash

Tushar Mathur — Fri, 04 Apr 2008 16:31:16 +0000

Yesterday, my parents, who are visiting us from India asked me, that since I write about Personal Finance and Investments for USA and India, what would be a safe investment vehicle to earn a monthly income from their cash reserves. This question caught me a little by surprise, because, since my Investment goal is growth for the long term, I never really thought about this.

So I started doing some research and concluded that for a stable monthly income that is insured and not very risky, the Post Office Monthly Income scheme would be the best. If there are other safe investment vehicles, please let me know in the comments section.

Below is some information about it.

The Post Office Monthly Income Scheme (MIS) provides for monthly payment of interest income to investors. It is meant for investors who want to invest a lump-sum amount initially and earn interest on a monthly basis for their livelihood. The scheme is, therefore, a boon for retired persons.

The post-office MIS gives a return of 9.5 per cent plus a bonus of 10 per cent on maturity. However, this 10 per cent bonus is not available in case of premature withdrawals.

INVESTMENT OBJECTIVES

Is MIS suitable for an increase in my investment?

No, the MIS is not suitable for an increase in your investment. It is meant to provide a source of regular income on a long-term basis.

Is MIS suitable for regular income?

Yes, the Monthly Income Scheme, as its name suggests, is best suited to provide regular income. Interest is payable on a monthly basis at the pre-specified rate.

To what extent does the MIS protect me against inflation?

With a fixed rate of return, the MIS does not provide adequate safeguards against high inflation rates.

Can I borrow against MIS?

Yes. Depends if the banker accepts it as a security.

RISK CONSIDERATIONS

How assured can I be of getting my full investment back?

Like all post-office schemes, the MIS has the backing of the Government of India, and is, therefore, a safe investment. You can be assured of getting your full investment back.

How assured is my income?

Your monthly interest income is assured at the specified rate of interest. Since this scheme has the backing of the Government of India, it is a safe investment channel.

Are there any risks unique to MIS?

No, there are no risks associated with your investment in MIS. This is a risk-free investment that is backed by the Government of India.

This is a monthly income plan that is utilised by those in need of a regular source of income, and is most suited to retired individuals. So, economic factors such as interest rates do not affect investment decisions as far as the MIS in concerned.

Is the MIS rated for credit quality?

No, the MIS does not require any commercial ratings as it has the backing of the Government of India. It is considered to be free of risk.

BUYING, SELLING, AND HOLDING

How do I buy a Post Office Monthly Income Scheme?

You can buy a post office MIS at any post-office in India.

What is the minimum investment and range of investment in MIS?

The minimum investment in a Post-Office MIS is Rs 6,000 for both single and joint accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint account.

What is the duration of MIS?

The duration of the MIS is six years.

Can MIS be sold in the secondary market?

No, you cannot trade your MIS in the secondary market.

What is the liquidity of MIS?

Investors can withdraw money before three years, but at a discount of 5 per cent. No such deduction will be made if an account is closed after three years. Premature closure of the account is permitted any time after the expiry of a period of one year of opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be made when the account is prematurely closed.

How is the market value of MIS determined?

As mentioned earlier, post-office MIS cannot be traded in the secondary market. Therefore, the question of market value of MIS does not arise.

What is the mode of holding of MIS?

Post office MIS is held physically in the form of a certificate issued by the post office. In addition, the investor is provided with a passbook to record his transactions against his MIS.

TAX IMPLICATIONS

The interest income accruing from a post-office MIS is exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt from Wealth Tax.

Feel free to suggest any other investments and I’ll take a look at them and write about them.

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