The birth of a child is one of the most joyful events in his or her parents’ life. But in today’s world, the joy is often tempered with a little worry, for raising a child is no longer a matter of ensuring he or she is well-fed and attends classes at school. With government primary education increasingly shoddy and colleges of all streams and descriptions an expensive proposition, the financial burden of child-rearing is at unprecedented levels. And we have not even started talking about wedding expenses yet!
The crux of the matter then, is that as parents we also have a responsibility to plan for our child’s future financial needs, and this means finding the right avenues of investment.
Most parents opt for Fixed Deposits or PPF’s and there’s nothing wrong with that, especially PPF’s, which are tailored for such type of savings. But they remain relatively low-yield, and PPF’s have a yearly investment cap, which means that on its own it is unlikely to be enough to meet the necessary expenses.
That leaves us with our old favourite, viz. Mutual Funds. Over a long period, equity-oriented Mutual Funds tend to give a return of 12-14% (subject, of course, to Market Risk), and you can, with some planning, figure out a safe figure to invest and reach the goals.
So the first step, then, is to define these goals. What will be your child’s requirement, and when?
- Higher education / Marriage
- Expected expenses
- Time left for expense to arise.
To use an example, assume that you are planning to invest to make enough money available for a possible foreign degree for your daughter. The present-day expenses for this, you have observed, are INR 60 lakhs over two years (assumed figure). Your daughter has just turned one year old. This means you have 20 years in which to accumulate as sum enough to cover the desired expense, and assuming an inflation rate of 8%, that gives an amount of 1.4 crores to be accumulated.
These figures appear to be extremely intimidating. But working backwards, you will find that assuming a long-term return of 13%, the monthly investment required to be made for 20 years is slightly over Rs 12,000 per month, which is fairly reasonable, all things considered.
But there is more to it that deciding a SIP amount. Investing on your child’s behalf entails considerable discipline and care. Select the Fund schemes to invest in carefully. You might want to split your target investment amount into 2 or even 3 schemes (more than that and you are over-diversifying). If your investment horizon is a long one, opt for equity schemes and assume a higher rate of return. If, however, you have started investing a little late and have fewer years in which to make this decision, you will prefer debt-oriented investments and assume a lower rate of return (which would mean a higher SIP amount).
There is, then a critical importance to starting early. The sooner you realise the importance of saving and start your SIPs the lesser you will need to set aside.
But this cannot be a ‘invest and forget’ case. Review the portfolio regularly and if a fund is consistently underperforming, consider switching the funds to another one. Reviewing too often is also dangerous though and give funds at year and then compare with benchmarks before making a decision.
Do not withdraw the funds for your own use. While we are often tempted to access these funds for our own uses or even emergencies, you should realise that these are the provisions you have made for your child’s future and hence avoid dipping into these savings.
On a similar note, do not stop the SIP for the same reasons as give above. While flexibility is indeed a major feature of the Mutual Fund SIP, it is not a good idea to skip SIPs for the funds you are investing on your child’ behalf, since if you do it once, it will be too tempting to keep stopping SIPs
And finally, switch to debt during the last 2 – 3 years of your targeted period. If you reach or exceed the target amount prior to the target date, do the same. Debt funds get a healthy return with a far lower risk, and the last thing you want is to face a sudden market downturn just when the money is required.
In summary, Mutual Fund investments can be the best way to provide a secure future for your children, provided you do so smartly and maintain discipline in the investing.
