Due Diligence. Invest and insure wisely for your little one

So your tiny bundle of joy has just arrived and it’s the happiest moment of your life. But now begins the task of planning for your baby’s future. No, we don’t mean the usual vaccinations that need to be given or the many toys that you need to buy to keep your baby in good humour.

It is about investing for your child and more importantly, reviewing your insurance cover so that your family’s future is financially secure.

Here we suggest investments that you need to start off when a child arrives and the changes that you need to make to your insurance cover.

You must open a savings account as soon as possible for your little one. During the child’s birthdays and other special occasions, there are sure to be cash gifts from relatives.

You must dutifully deposit this money in the child’s savings account. Besides, you could start giving pocket money to the child when he/she begins school as well. Having a savings account in his/her name will teach them the art of saving. Major banks, such as ICICI Bank, Axis Bank, HDFC Bank, ING Vysya Bank and Kotak Bank allow you to open accounts in your child’s name. A few banks allow you to open accounts for a child as young as a day old!

While opening an account marks the first step, you must now look at investments. You can start with opening a PPF account in your baby’s name. With the investment limit increased to ₹1.5 lakh, you can split this amount between your account and that of your child’s. If you open an account when your little one is one to two years old, you can have the PPF account mature at a time coinciding with your child’s entry into college, giving you a tidy sum.

If you extend the PPF account further than 15 years for another five years, your child would have become a major and can operate the account himself/herself. The proceeds would be tax-free for you and your child.

The next step would be equity investments. You can look at large-cap or balanced funds to start systematic investments for long-term goals.

You should preferably avoid all child ULIPs or insurance products, which are expensive and offer low returns.

There are also a couple of quality mutual funds such as HDFC Children’s Gift, which comes with two plans — investment and savings. The former is an equity-oriented balanced scheme, while the latter takes higher debt exposure. These schemes allow you to invest on behalf of your child. If you are conservative, you can opt for these schemes.

Opting for equity-oriented funds, either large-cap or balanced, would mean that you can invest in either your name or your child’s name and get tax-free proceeds, provided all investments are over one year old.

Given the fact that the arrival of a child entails expenses and also outflows toward investments specific to the child, reviewing your life cover must be top priority for you. You must enhance your cover to reflect the additional expenses and investment commitments, which means increasing your term insurance by at least another 20-25 per cent.

Take a medical cover for your family that includes your child as well. In case you already have a medical insurance policy, you can consider adding your child in it. Insurance companies usually allow children to be added to your cover from the time they are three months old.

Increase the sum-insured by at least another 30 per cent in case you have a family floater policy. If necessary, you can also add accident and critical illness riders for a small increase in premiums. These steps are critical to protect your corpus and your planned savings for the future of your child.