A child savings plan is a savings or investment option designed to help parents prepare for their child’s future financial needs. Some child savings plans also combine investment benefits with life insurance coverage.

The main idea behind a child savings plan is to set aside money while mitigating financial risks. Parents must evaluate and select their preferred option based on the child’s age, intended purpose, investment horizon, risk tolerance, and affordability. Parents need to select a suitable plan with a long-term view and align it with their overall investment strategy.

Reasons why you should consider child saving plans

Set goals

With child saving plans, parents can make provisions for specific goals such as meeting college education fees, funding overseas studies, or a child’s professional courses. Parents should start as early as possible and save consistently. This helps to accumulate a significant amount of money that can be utilized for the intended purpose.

The earlier one starts, the more there are opportunities for wealth accumulation through investment plans. As the intended day nears, one can consider switching to a less risky investment option.

Make available some withdrawal options.

Some investment and insurance plans allow withdrawals of some amounts to meet specific financial obligations. Parents should consider plans that allow withdrawal of some money before maturity. However, one must understand the terms and conditions that apply to such a move. The conditions may vary depending on the chosen plan.

Mitigate financial risks

The best child saving plans should have a mix of investment options. Some investment plans in India offer a combination of equity and fixed deposit options. Some of the common options include ULIP, mutual fund SIPs, Sukanya Samriddhi, PPF, and Debt Funds.

This way, there is a balance between the investment in fixed-income generating assets and those that accrue higher returns but come with higher risks. The advantage of such plans is that they help in meeting the child’s needs even when the parents’ financial status changes.

Financial provisions for changing needs

As children grow older, they may incur more expenses. For example, they may seek to further their studies to different levels and different streams. The costs of education continue rising over time, which makes it a great concern to parents.

A child saving plan assists in providing some financial support towards fulfilling such needs over time. This may be in the form of a lump sum payment upon maturity or claims as applicable with some plans.

Investment options for children’s financial goals

Diversifying one’s portfolio can help in balancing the risk level between the ones facing no risks and those that involve high volatility. Some common investment options include ULIP, mutual fund SIPs, Sukanya Samriddhi, PPF, and Debt Funds.

1. ULIP policy

This is a unit-linked insurance plan that provides life cover and comes with investment options. The option allows one to pick the most suitable plan based on one’s risk appetite and financial goals.

One can choose from the available funds to select one that matches one’s risk tolerance level and investment objectives. ULIP plans normally come with a five-year lock-in period.

ULIPs can be suitable for long-term needs, especially if one understands the various factors associated with them.

2. SIP (Systematic Investment Plans)

SIPs enable investors to make regular contributions to a mutual fund, and they usually have a specific time horizon. SIP allows one to grow wealth on a regular basis, especially over a longer-term period. In addition, one can increase one’s contribution depending on one’s financial needs and affordability.

A SIP per se is not a tax-saving instrument; however, the underlying mutual funds can allow tax-free growth of wealth.

3. Sukanya Samriddhi Yojana (SSY)

SSY is a government-backed savings scheme aimed at supporting the education and marriage expenses of a girl child. Sukanya Samriddhi Yojana provides attractive returns to those who contribute to it.

This scheme is open to any guardian willing to save towards the future needs of an eligible girl child. The scheme has specific terms and conditions.

4. PPF (Public Provident Fund)

Public Provident Fund is a government-backed long-term savings scheme. Parents can choose to open a PPF account on behalf of their minor children.

Key features:

  • PPF is a long-term savings scheme with a maturity period of 15 years.
  • One can consider extending the maturity period in blocks of 5 years.
  • Loans and withdrawals are allowed at the discretion of the bank under applicable terms and conditions.
  • The interest rates are determined by the Government of India.
  • It is a good option for those looking to make long-term savings.

Conclusion

There is no best child savings plan that works for every parent. Parents should, therefore, consider their specific needs when choosing the best option. The first step in selecting the best option is to estimate how much one needs to achieve a specific financial objective. Then, one should estimate how long it will take to reach that point. With that knowledge, one picks the most appropriate option.

When considering options for a longer-term view, it is advisable to use a balanced approach and pick some mix between the various investment plans. Parents should consider reducing their exposure to higher- risk investment plans as the maturity day nears. The advantage of choosing a balanced approach between volatile and safe investment plans is that it reduces risks associated with wealth protection.

The bottom line is that the most appropriate option for child savings depends on individual choice, the intended purpose, financial risks one is willing to withstand, and the applicable Indian tax rules.