Child Plan or Mutual Funds – Which is the better investment option?

Published On: 14-May-2020

When it comes to saving from different financial goals, one can choose from a wide range of investment options. Such options may include traditional investment products like Unit Linked Insurance Plan (ULIPs), endowment insurance policies, etc. With the evolution of the financial markets, mutual funds have emerged as an investment option for wealth accumulation and wealth creation. 

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Saving and investing for a child’s education is always one of the primary financial goals for a parent. One always tries to plan the best for a bright future of their child, which lends a high emotional value to such goals. Planning for this goal must be done carefully and choose the right investment option. 

There are several Child Plans offered by different insurance companies, which often club the investment and insurance requirements together. In such a case, one can aim to accumulate the required corpus from the regular premium accumulations and the returns from the investment. 

Further, in case one or any of the parents pass away, the sum assured amount will be paid to the beneficiary. Thus, it aims to eliminate the uncertainties and provides a financial cushion to the child. 

Here are the fundamental differences between Child Plan and Mutual Funds:

Insurance Cover

Being an insurance plan, child plans carry default insurance cover for any or both of the parents. On the other hand, mutual funds are primarily an investment product and do not provide any insurance cover by default. To cover the risk of future uncertainties, one can buy a term insurance plan while investing a small portion of the savings in mutual funds.

The flexibility of Investment Portfolio

Child plans may not provide any flexibility in the investment portfolio, apart from providing the basic three options of a conservative, moderate, and aggressive portfolio. On the other hand, the investor has the option to choose from a broad spectrum of mutual fund schemes to achieve their financial goals.

Alignment with Risk Profile

While the investors can only broadly align their risk profile in the Child Plan, mutual funds allow flexibility in terms of aligning the portfolio with the risk profile. This is because an investor can opt for different mutual fund schemes to maintain a diversified portfolio. 

Performance

Child plans tend to be relatively conservative in their investment strategy since the primary objective of the policyholder is to stay insured. In contrast, any returns from the investment portfolio are only secondary. On the other hand, mutual fund schemes can be a preferred option to achieve the desired investment goals, as professional fund managers manage the money on behalf of the investors. A team of research analysts also backs such fund managers, and the investment decisions are made based on extensive research. 

Considering the long-term investment horizon for financial goals like a child’s education, one must start investing early. Further, the chosen mutual fund schemes must equip the investor with the potential of better returns. Taking into account the potential of equity markets for long term wealth creation, one can choose to invest in equity funds for such goals. 

Within the broad category of equity schemes, the investors can register a Systematic Investment Plan (SIP) for investment in mid-cap and small-cap schemes, as such schemes tend to perform well, especially with an investment period of 10 years or more. While there cannot be one best mutual fund scheme for a child’s education, one must select the mutual fund scheme to suit their risk-bearing ability.