Expert Talks: Planning for children, by children

Today's generation has definite plans for future when they reach the age of 20. They need your financial assistance and a bit of motivation.

Participatory planning

So now since they know the world better, they should know money too. They should know the difficulty in earning a penny. They should participate in their wealth creation exercise supported by parents. Savings and investments should be made familiar to our kids. Include them in all discussions, especially money related. Participatory planning will benefit in a lot of ways. 

a) Your kid will know money better b) you cannot play around with kid's investments since they may raise questions. c) they will learn the importance of long-term savings at an early age. d) It will enrich their analytical skills and general awareness. e) a more responsible and practical attitude towards life will evolve in them. 

Planning constituents

First obviously is a savings account. Coins and contributions accumulate in the piggy bank which later could be deposited in kid's account.

Now banks even offer chequebooks, debit cards and internet banking facilities on accounts of children aged 10. Savings account acts as a source of immediate liquidity and for channelising funds to other investments. Just keep a desired monthly expense amount above the minimum balance.

A Systematic Investment Plan for each goal is the slogan of the day. You can invest towards expense on admission as well as monthly fees once the schooling starts. Investment should ideally start before the first birthday. One can set systematic withdrawal from equity funds towards monthly or quarterly school fees. 

A long-term SIP will help meet higher education costs without relying much on loans. Better opt for longterm Equity Linked Saving Schemes targeting higher education corpus which will serve the purpose of tax saving (under section 80C). They are closed-ended to ensure no intermittent redemptions.
Choosing dividend payout option can yield small income during the Jan-March season which could be used for vacation.

Child plans too are good, but the only difference is the name tag. While choosing Unit Linked Insurance Plans, have an eye on total charges each year, which are very high for child plans.

A minimum affordable sum every month could be invested in Public Provident Fund too. Since the tenure of PPF is 15 years, only those with young kids could opt this. This too enjoys the 80C benefit.

An indispensable investment in the name of girl child would be the new Sukanya Samridhi Yojana. When the scheme started, the interest rate was 9.10% which gradually dropped to 8.3%. 

The deposit tenure is 14 years and maturity after 21 years. If we assume an average interest rate of say 6% for the next 21 years, the accumulated amount on maturity will be just under Rs 10 lakh for a monthly investment of Rs 2500, and 50% of it could be withdrawn for marriage or higher education. This too is eligible for 80C. 

Gold is always a hedge. But just think how special gold ornaments would be in your daughter's wedding after 20 years and invest accordingly. 
Sovereign gold scheme yields minor interest, but otherwise, gold investments always rely on price appreciation. Gold Exchange Traded Fund would be another option.

(Vijayananda Prabhu is an investment analyst with Geojit Financial Services)