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Children, money and savings

Understanding the kind of investments that your child needs in the future is crucial, but picking up the right product is more important


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

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The biggest problem is definitely choosing the right product for the child's future. There are 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 tack. I have no opinion on the merits of health drinks, airlines or cars that use this track. However, financial products are a different matter altogether. Insurance as well as mutual fund products that have the words 'child' or 'children' as part of its nomenclature have been around for so long that a lot of savers assume that these are a specific class of products that provide some unique advantage to their children's future more than other products available in the market.

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.

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.

Indian laws do not have any provisions for any tax-breaks or any other facilities that is available to a financial product that is meant to specifically finance some aspect of your child's future. As experts, most of us believe there should be, but that's a separate issue altogether.
You should estimate the amount of money that you may need and the time-frame you will need it in. Then, simply choose investments best suited for the purpose. The 'child plan' part is irrelevant..

Let's turn to another 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?

We expect that such things will be tackled in formal education so that your child will learn about it in school. However, very little is being done to fulfil this goal. The changes done so far in the curriculum is cosmetic. There will be some rote learning just like in every other subject with no connect to real life. As parents, the best thing you can do for your children's financial future is to equip him or her with the understanding of how money works. This will help him take informed decisions for his investments in the future.

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