Life Insurance: Buying life insurance is not a one-time exercise. At every stage of life, you should evaluate, if you have adequate life insurance to meet the aspirations you have for your children, in the event of an unfortunate death. Your life insurance should cover not only the current expenses of your children, but also the future obligations towards your children’s education and marriage. If your life insurance is not adequate you should buy additional term policies. ULIPs are more suited for younger investors with high risk appetite. Since ULIPs invest in equity markets, the returns can be very volatile. ULIPs give much lower returns than mutual funds over a shorter investment horizon due to the high charges like premium allocation charges, policy administration charges, mortality charges etc. Generally in this stage of life you should avoid ULIPs
Investment: When your children are in the age group of 10 – 18 your risk tolerance level is moderate and gets lower as your children approach college and higher education. Balanced funds are excellent investment choices for parents with children in this age group. These funds typically have 60 – 70% of the portfolio invested in equities and the rest in fixed income securities. Due to the equity component these funds can give attractive returns, while the risk is substantially lower compared to equity funds due to debt component. Parents should switch their assets from equity funds to balanced funds when their children reach this age group. Parents should use systematic transfer plans (STPs) to transfer their accumulated corpus from equity to balanced funds. STP is a mechanism to transfer your assets from one fund category to another gradually over a period of time. STP is effective in volatile markets and negates the need to time the market. In addition to switching your accumulated equity fund assets to balanced funds, you should continue to grow your corpus by investing on a monthly basis through SIPs. Typically parents of children in this age group have higher income than younger parents. Your contribution to employee provident fund, principal component of your home loan EMIs, children’s school tuition fees and life insurance premiums typically constitute the major portion of your 80C tax saving. If you need to make additional tax saving investments to meet your 80C investment limit, you should invest in ELSS for your children’s longer term goals like marriage. As your children approach their college education you should switch to more conservative investment options like income funds or monthly income plans, depending on your risk profile and financial objectives. As discussed earlier, STP is an effective mechanism for transferring your assets from equity or balanced funds to debt funds or MIPs. For your children’s marriage you should continue to invest in Gold ETFs through SIPs. Use one time cash flows to top up your investment in Gold ETFs.