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What's Better for Your Child's Education? Child Plans or Mutual Funds?

When it comes to investing in your child's education, two popular options are child plans and mutual funds. Read ahead to know which one is best for you and your children.

  • 5,764 Views | Updated on: Apr 25, 2024

In today’s society, when inflation is high, it has become more important than ever to plan for your child’s future. Since education prices are rising at an alarming rate, you should invest in the best child plan in mutual funds to help your child pursue their aspirations conveniently. When it comes to saving for financial goals, there are several investment options to choose from. Investment plans, such as Unit Linked Insurance Plans (ULIPs) and General Savings Plans, are examples of such alternatives.

When it comes to putting money aside for your child’s schooling, or other needs, you have only two options: child plans or mutual funds. It’s understandable if you’re unsure which one will benefit you the most.

What is a Child Insurance Plan?

Child insurance plan are financial instruments designed to provide protection and financial security for your child’s future. These plans aim to secure your child’s future in the event of an unfortunate circumstance like death, accident, or disability of the parent or guardian. A child insurance plan is essentially a life insurance policy that is specifically designed to secure the financial future of your child.

The basic structure of a child insurance plan involves a policyholder (parent or guardian) who pays a premium to an insurer. The insurer then provides a guaranteed sum assured to the child in the event of the policyholder’s death. The policy may also provide additional benefits like educational expenses, marriage expenses, and other such needs.

How Does Child Plans Work?

The working of child plans is simple. Parents choose a child plan based on their needs and budget. They then pay regular premiums for a specific period, which can range from 5 years to 25 years. The premium amount and the sum assured depend on the child’s age, policy term, and the benefits are chosen. The premium payments continue until the policy term or the policyholder’s death, whichever is earlier.

In the event of the policyholder’s death, the child receives the sum assured as a lump sum payment. The sum assured can be used to cover the child’s future financial needs, such as education, marriage, or any other expenses. In case the policyholder survives the policy term, the child receives the sum assured on maturity.

What is Mutual Fund?

Mutual funds are an increasingly popular way for people to invest their money in a diversified portfolio of stocks, bonds, and other securities. In this article, we’ll explore what mutual funds are, how they work, and what you should know if you’re considering investing in them.

A mutual fund is a pool of money that is invested in a variety of different securities, such as stocks, bonds, or other financial assets. When you invest in a mutual fund, you’re buying a small piece of that pool, and a professional fund manager manages your money. The fund manager is responsible for choosing which securities to buy and sell in order to meet the fund’s investment objectives.

Who Should Invest in Mutual Funds?

If you are a beginner investor and do not have a lot of knowledge about the stock market or investment options, mutual funds can be an excellent option for you. Mutual funds are managed by professional fund managers who have extensive knowledge and experience in the field. They make investment decisions based on their analysis and research, which can be difficult for an individual investor to do on their own.

Mutual funds are also an excellent option for investors who do not have a lot of money to invest. Mutual funds allow investors to invest smaller amounts of money, which can be as little as ₹500.

Child Plan Vs. Mutual Fund: A Comparison

Investing for a child’s future is one of the most important decisions a parent makes. Two of the most popular options for parents to invest in their children’s future are child plans and mutual funds. Here is the difference between a child plan vs. mutual fund

Factors

Child plans

Mutual Funds

Investment Objective

To provide financial security and ensure future education expenses for the child.

To earn long-term capital appreciation and provide higher returns than traditional savings options.

Investment Portfolio

Primarily invested in debt instruments and some equity instruments.

Investment portfolio varies as per the fund’s objective and can be equity, debt, or a combination of both.

Lock-in Period

The lock-in period varies between 5-10 years, depending on the plan.

No lock-in period; investments can be redeemed at any time.

Liquidity

Partial withdrawals are allowed in case of emergency. However, surrendering the plan before the lock-in period attracts penalties.

Investments can be redeemed at any time without any penalty.

Returns

Relatively low to moderate returns of around 6-10% p.a.

Higher returns than child plans, averaging 10-15% p.a. However, market volatility can lead to lower returns.

Taxation

In accordance with Section 10(10D) of the Income Tax Act, the maturity amount is tax-free.

Taxed at the applicable slab rate if redeemed within a year. If held for more than a year, long-term capital Gains tax is applicable.

Risk Factor

Low to moderate risk due to the conservative investment portfolio.

Moderate to high risk due to the fluctuating market conditions.

Insurance Benefits

Child plans to offer insurance coverage in case of the parent’s untimely death.

Mutual funds do not offer insurance coverage.

Child Plan vs Mutual Funds

Child Plan vs. Mutual Fund Which is a Better Investment Option?

A child plan is usually superior to a mutual fund when it comes to saving for your child’s future. The performance of mutual funds is entirely dependent on the stock market. If the stock market declines, so does the fund’s performance, and your investment in it suffers a considerable loss.

Child insurance programs urge you to save diligently while also providing coverage for your child in unavoidable circumstances.

A child’s insurance plan is the ideal safety net for your child due to the following reasons:

Helps Meet Your Children’s Education Cost

In India, the cost of general education has increased fourfold. This means that by the time your child reaches the age for college entrance, the cost of higher education will skyrocket. Regular contributions to a child plan in mutual funds can assist you in amassing the finances required to give your children a great education.

Covers the Costs of Medical Treatments for Your Children

Healthcare expenses are rising at twice the pace of overall retail inflation. As a result, it’s critical to prepare for unanticipated health issues. In addition, the proceeds from your child plan insurance may be used to cover treatment costs, allowing you to offer necessary medical support to your child in the event of a medical emergency.

Provides Tax Benefits

The premiums you pay for your child’s insurance policy can be deducted from your taxable income up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961. The returns are also tax-free if the policy meets the requirements of section 10 of the Internal Revenue Code (10D).

Offers Premium Waiver Benefit

The child plan in mutual funds continues even if the policyholder dies during the policy term. The insurance company waives all remaining premiums. In a parent’s absence, the child does not have to suffer.

Final Thoughts

When your child is old enough to go to college, they will ideally have a sizable saving account set aside to pursue their interests, attend a university of their choice, and study in the place of their choice. Choose a solid child plan in mutual funds to give your child the secure financial future they deserve. In this manner, even if you cannot care for your child, they will still be fully protected.

    Key takeaways

  • Child insurance plans are financial instruments designed to provide protection and financial security for your child’s future.
  • In the event of the policyholder’s death, the child receives the sum assured as a lump sum payment. The sum assured can be used to cover the child’s future financial needs.
  • Mutual funds offer people to invest their money in a diversified portfolio of stocks.
  • Mutual funds are an option for investors who do not have a lot of money to invest.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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