Any parent would get lured by the idea of securing your child’s bright future. In the past two decades from the 1990 onwards, children’s ULIP and Children’s Gift Fund (a type of mutual funds) sold as hot cakes especially when it came to insuring your child’s future.
A parent should understand the features of these products before investing in them:
Cover: While children’s ULIP would cover the risk of life of the family’s earning member i.e. if the family’s earning member dies / is incapacitated then the child’s future is secured by the insurance company; the children’s GIFT fund or an ELSS fund does not have this facility. Mutual funds provide returns only on the invested capital they are not responsible for the life/health of the bread earner/child.
Cost: All services come at a cost. The cost of combining insurance and investment in one package such as in the case of ULIPs is higher than the cost of investing in a mutual fund. This cost in mutual funds is measured by the expense ratio. It is the annual cost of operating a mutual fund divided by the average assets under management (AUM) during the same period. The expense ratio of an ELSS fund and that of child plans is limited to 2.5%. On top of it, if we opt for a direct plan where you buy directly from the fund house, then this ratio is further reduced.
Lock in: While ELSS have a lock in period of 3 years, child’s mutual fund have a lock in up to when the child reaches the age of majority and children’s ULIP plans have a lock-in as decided by the insurer which ranges between 5 to 7 years.
Equity exposure: As stated earlier, Children’s ULIP has a maximum exposure to equity limited up to 50%, mutual fund investment is in line with the balanced equity oriented mutual fund (Min. equity exposure of 65%) while that of an ELSS fund can extend to 100% percent in equity.