Friday, July 17, 2009

INVESTMENT OPTION FOR CHILD'S EDUCATION

Vishal Manakame wrote :
Sir,

I accidentally came across your blog while researching for Children policy. I did spend some time reading the posts on your blog and found it really informative and hence this question. I look forward to seeing your advice on this.

I am 36 and am looking for a children policy for my 4 yr old son. My objective is to have sufficient funds by the time he finishes school and goes into higher education - so looking for a 15 yr time frame and generating about 20 lacs by that time.

Recently I was approached by HDFC for HDFC Unit Linked Young Star Plus II policy and have almost signed this for Rs 60,000 /- PA. But when signing I realized that their charges are very huge the first year - only 17,000 will be in my portfolio in the first year. Subsequent years it does tapers off significantly though. What I realized is that in 5 yrs I would have about 3 lacs (my actual outflow) in my portfolio assuming 10 % returns and that has worried me.

I realize from your blog that you do not like ULIPs, but my question is - given children's policy options would it still make sense for me to go with the above policy? if not would you suggest any alternative policies (traditional or other investments). My objective is more on generating a corpus rather than insurance, which I feel i can ans will need to buy some term policy.

Thanks much
VM


SRIKANTH'S COMMENTS :

Dear vishal,

Please remember that you are investing for your kid for future returns rather than Insurance. Right?

I always say ULIPs are expensive products with high initial charges. I am not in favour of any child plan . If one has enough term cover that will do. Child plans are long term gambles like ULIPs. How well an insurance company manages your investment part is a gamble. These are all ways to get more money from you. At maturity you will realise that the returns are not great. Better to keep INSURANCE & INVESMENT separate.
However, let me first tell you about Insurance Child Plans. Compared to Other Child Plans, your choice of HDFC seems okay especially because HDFC in addition to Death Benefit option also offers Critical Illness Benefit.
I however felt ICICI Smart Kid RICH fund is slightly better. You can compare it with HDFC Young Star Plus also, though ICICI Smart Kid scores over it in many aspects. For instance, HDFC has high allocation charges in first year (60%) compared to ICICI Smart Kid (18%) in a regular ULIP. So you will have lesser units in your coffers in early years, especially in times when sensex is reported at all time low. Please consider for all three important riders (I) Premium Benifit Rider (II) Disablity and Accidental Benifit Rider and (III) Income Benifit Rider. Do not discontinue paying premiums (in case you are opting for regular premium) after three years or so. ULIPs are long term products and prove fruitful only in long term.

Please try to compare Illustrations of following Child Plans & Term Plans from Same Insurance Company.

BIRLA SUNLIFE CHILD DREAM PLAN with MAX. COVER with Minmum GUARNTEED Benifit of Rs.75000/- & Minimum PREMIUM.

KOTAK HEAD Start Future Builder

ICICI PRU SMARTKID

AVOID those Plans which offer Lower Insurance Cover(10 Times of Annual Premium).
Pleas. If possible, try to get the Feb 2009 issue of Outlook Money. It is KIDS Special & Contains very Usefull Information about Future Secure of Children.


My take is, Go for Term Insurance. They are cheap and then invest in Good Diversified Mutual funds, especially those which offer Free Insurance Cover.I.e, if you really interested in this Insurance Combo offer.
Among the Funds that Offer Free Insurance Cover, DWS Tax Saving Fund is the best, as it offers 5 times your Investment as Insurance Cover with no Conditions or fine Print. And, after the Compulsory lock-in period of 3 years, there is no exit load too.
My Fund Picks for your son would be
Birla Sunlife Equity Fund
DWS Tax Saving Fund
Kotak K30 Fund
Reliance Growth Fund
Birla Offers 100 times your Monthly Payment as LIfe Insurance
DWS offers 5 times your invested amount as Life Insurance
Kotak and Reliance offer to pay your Balance SIP amount in case of your death.


Some Funds like Principal Personal Tax Saver and HDFC Children`s Gift Fund offer Accidental Insurance Cover too.

However, stick to the above funds for Good Gains and are definitely better than ULIPs. Child Plans are just Attractive Packages with nothing inside. Just buy Mutual Funds recommended by me and keep it aside as if you have invested in a Child Plan and do not have the right to withdraw till 18 years and see the magic of Compounding giving you absolutely stunning returns.
Best of luck,
Srikanth Shankar Matrubai

P.S. I have posted separately a Post on HDFC Young Star Plus on my blog. Please read it there. visit

http://goodfundsadvisor.blogspot.com/2009/03/hdfc-young-star-plus.html

Also visit

http://equityadvise.blogspot.com

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