In today’s world of inflation, it has now become quite mandatory to buy a plan for your child’s financial future. It has become quite important to build a Where the mutual funds are completely investment-oriented, a Child Saving Plan helps fulfil savings & protection.
What is a Child Plan?
A child insurance plan not only takes care of the financial future of a child but also offers flexible payouts. The funds secured for the child’s future can be used for expenses, such as marriage, education, etc. A part of the premium is allocated towards investments, which can be used to build a corpus for their education, marriage, etc. Another part of the premium is allocated towards insurance, which ensures the financial security of a child in case of the sudden demise of the parent.
What is a Mutual Fund?
Investments in mutual funds are regulated under the Securities & Exchange Board of India (SEBI), which allows parents or guardians to open an account in the name of a minor, whether a boy or a girl. The legal guardian has to manage the funds until the minor child attains majority, hence securing their financial future. It is suggested to start investing as early as possible to take advantage of the power of compounding, helping to build a strong financial base for the child. Mutual Funds are considered to be investment pools, where funds are collected from multiple investors & invested in a diversified portfolio of assets. The investors are supposed to share the profits & losses of the whole fund equally. Due to this shared ownership, these funds are known as “Mutual Funds”.
Difference between Child Insurance Plan & Mutual Funds
Provided are the differences between the Child Insurance Plan & Mutual Funds:
| Basis of Difference | Child Insurance Plan | Mutual Funds |
| Investment Objective | This plan offers financial security & helps meet the future educational expenses of the child. | Helps earn long-term capital appreciation, hence offering higher returns in comparison to a traditional savings plan. |
| Investment Portfolio | Mainly in debt funds, & some portion in equity funds. | The choice of portfolio depends on the objective, which includes debt, equity, or both. |
| Lock-in Period | It ranges between 5 to 10 years. | There is no lock-in period, which means the funds can be redeemed at any time. |
| Liquidity | Only partial withdrawals are allowed during emergencies. But if you want to surrender the plan, it will attract a penalty. | It allows you to redeem the investments at any time without any penalty charges. |
| Returns | Returns are quite low, ranging between 6 to 10%. | It ranges between 10 to 15%. |
| Taxation | The maturity benefits are exempt from taxes u/s 10(10D) of the Income Tax Act, 1961. | If the funds are redeemed in the first year itself, the investment will be taxed at the applicable slab rate. In case it is held for more than a year, the long-term capital tax will be applicable. |
| Risk Factor | These investments are conservative, hence they attract low to moderate returns. | These investments are linked to the market, hence they contain moderate to high risk. |
| Insurance Benefits | This plan offers insurance coverage in case of the untimely death of parents. | No benefits of insurance coverage can be availed under this plan. |
Features of a Child Saving Plan
Provided are the benefits of a child savings plan:
- Financial Security:
By helping to accumulate a corpus of funds, it offers financial security.
- Long Term Savings:
It offers long-term savings, which range from 10 to 25 years, & helps to meet children’s future obligations.
- Guaranteed Returns:
Some plans provide guaranteed returns, protecting the investments from a volatile market.
- Life Insurance Coverage:
Get life insurance coverage that helps you meet your financial obligations in case of sudden demise.
- Disciplined Savings:
It helps to plan savings in a disciplined manner, helping you make a habit of setting aside the funds every month.
- Tax Benefits:
It offers tax benefits such as exemptions on principal amount, maturity amount, & partial withdrawals.
Features of a Mutual Fund Account
Provided are the features of a Mutual Fund Account:
- Diversification
It collects funds from different investors & invests in stocks, debts, or assets.
- Professional Management
It takes the help of professional fund managers to manage funds, hence saving time & effort.
- Affordability
Make small investments which make it easily accessible to everyone.
- Liquidity
They are liquid; hence, they can be purchased or sold on any business day.
- Systematic Investment Plan (SIP)
Make small investments through SIPS to create wealth over a period of time.
- Tax Benefits
Some funds offer tax deduction u/s 80C, such as ELSS.
- Transparency
It is a transparent investment which provides updates on the fund’s performance & detailed reports.
- No Lock-in Period
Many of the mutual funds do not have a lock-in period.
Child Plan or Mutual Funds- which one to choose?
While comparing a child plan & a mutual fund, the main deciding factor is whether to choose a pure investment plan or protection with savings. Many families opt for the Best Child Insurance Plan, which will offer financial security & insurance benefits. This is due to the mutual fund performance being dependent on the market, which means a decline in the performance of the investment. It helps save funds along with coverage
Conclusion
The appropriate time to start with a child plan is now, i.e., the sooner, the better. The longer the tenure is, the better the returns are, & also, the sooner you plan, the lower the burden is on your pocket. One should be regular in their savings as it will help accumulate funds to fulfil the financial obligations towards children.
Hence, with the help of considerate planning, one can meet the financial obligations related to their children’s milestones, hence providing them with a brighter & more secure financial future.