VR Logo

Your children and money

Every saver recognises that one needs to plan for children's' future needs but there are a lot of misconceptions about how to go about doing so

Your children and money

When it comes to children and personal finance, there are two distinct issues that parents face, or should face. One is the obvious one, which is to save for children's future needs. Until a couple of decades ago, this wasn't really a top-of-mind issue with Indian parents, as publicly-funded, reasonably-priced education did the job, more or less. Now, most parents with growing children are now acutely aware of how expensive education is, and try to save enough to finance it. Still, this is only one children-related money issue. There's another one, which most parents are not aware of, but is actually more important which I'll come to in a moment.

The biggest problem in actually saving for children's future is products that are marketed specifically for this purpose. Of course, this is not specific to personal finance. It's a common pitch for all kinds of products and services: 'If you love your children, buy our product.'

It's a simple, direct and manipulative trick. While I have no opinion on the merits of health drinks or airlines or cars that use this tack, financial products are another matter. Insurance as well as mutual fund products that have the words 'child' or 'children' in their name have been around for so long that a lot of savers assume that there is a specific class of products that provide some unique advantage to their children's future that other products do not.

At Value Research, we get a lot of emails from parents who are looking for the best possible 'child plan' for their kids. With years of background exposure to the phrase, they just assume that like a tax plan or a pension product, a child plan is an integral part of personal finance. Unfortunately, 'child plan' is actually a marketing term, and not a financial one. It's most unfortunate that recently, when mutual funds regulator SEBI standardised fund categorisation, it gave its blessings to this wholly misleading idea of a 'children's fund'.

There's nothing distinctive about such products. For example, one of the largest 'child' mutual funds was just a balanced fund of mediocre performance. The sales pitch was that you should invest in it and use the money for your kids' college fees. However, the returns that such funds produce are not made up of money that is especially designed for paying college fees-it's just normal money. Parents would have done much better by investing in a better balanced fund.

In Indian laws and regulations, there is no special tax-break or any other facility that is available to a financial product that is meant to specifically finance some aspect of your child's future. Most of us believe there should be, but that's a separate issue.

You should estimate the amount of money that you may need and the time-frame you will need it in. Then, simply choose investment best suited for these. The 'child plan' part is irrelevant.

Let's turn to other problem regarding children and money, which appears less urgent but is actually more important in the long run. Most of us teach children nothing about money. I find that grown children, even teenagers, have no real idea about how money works. Not only do they not know about earnings, savings and investments but they literally have no idea about the flow of money in society.

What happens when you buy something? What exactly does a bank do with your money? How do taxes work? What are investments? How do investments grow? How is money created? Why does the value of investments increase with time while that of a car or a phone decrease? Why were prices of things low in the past? Why will they be higher in the future? Etc etc.

We expect that such things will be tackled in formal education and your child will learn about them in school. However, that's not happening. Even if it does, there will be some rote learning just like every other subject and nothing will connect with real life. The best thing you can do for your child's financial future is to equip him or her to understand how money works.