July 23 , 2013
In the Indian culture, thankfully, most parents save and invest for their kids' future needs much in advance. According to a 2 year old survey by ET, 63% parents started saving for their child between 0-3 years of age. This is a laudable figure because the earlier one starts lighter the financial load as it is laid out over the years.
But the sad part is majority of the participants were wrong with the choice of investment option for their child's future goals. About 70% had resorted to PPF, fixed deposit and traditional insurance policies which have very low yields. This meant most of them would financially lag behind their goal due to poor choice of investment plan. Choosing the right investment option is the most crucial part of any investment.Have a strategy for child's investments
A target is more likely to be hit if there is a strategy devised. Yet when it comes to saving and investing many tend to overlook the necessity of planning investments. We will outline how you can achieve this.
First of all think of the time horizon. How many years do you have for the goal to realize? For kids' future needs if there are 5 or more years to go, it is a long term investment. Longer the investment horizon, more risk your investment can afford.
Secondly it is necessary to plan what expenses you want to save for. You might plan to save for your child's education and marriage. A random investment of some amount in some child plan could keep you less than happy on your child's wedding day or during admission period.
Parents should sit down and draw up estimated expense on desired higher education and wedding expenses by adjusting today's costs for inflation. For instance if cost of education for a professional graduate course is Rs 5 lakhs today, 15 years from today it will cost Rs 18 lakhs, calculated at inflation rate of 9%. Then you can calculate how much money you ought to invest regularly starting now to achieve the required amount within the required time. Using online calculators you can find in the above case that you require a monthly investment of about Rs 3,000 to reach the target amount in 15 years, assuming an annual return of 12%.
Once you have a direction on time horizon and quantum of amount required you can launch hunt for the best investment option for child's future needs.
Important parameters for best investment plan for children
If you asked parents who are saving for their children what the biggest concern about the investment is, more would say it is assured returns than good growth of capital. Therefore many of them would not dare to think beyond FDs and conventional 'child' insurance plans.
It is important to understand firstly that in long terms the uncompromising requirement for investment option should be that it gives good returns well above inflation. Not to say that safety of capital is to be ignored but the truth is in long term investment your capital is almost always safe. Even if there might be fluctuations, when you average the returns the capital would have been protected.
Secondly long term investments accumulated over time tend to be bulky so you need to choose investment options that minimize tax liability or best eliminate it. You do not want a chunk of returns to go as tax.
Thirdly since financial part of your child's education and marriage are goals you do not want to fail in, the plan chosen should instill disciplined investment. The investment plan should at best be automatic, so there is no worry of missing investments due to forgetfulness, lack of time etc.
Fourthly charges of investment should be minimal. Since the investment would be recurring in nature you would have to bear recurring costs on investment for child. Charges eat up on the returns so it is important to choose products with low charge.
It takes a smart parent to make smart financial decisions to secure the future of their Young Scholar or SmartKid and to provide them enough Annuity for Education or Endowment at Marriage. Refer to our article Best Investment Plans for Children for suggestion on the best mutual funds.
Educate yourself well on personal finance and if you are not very confident about investment decisions you wish to make, consult an advisor. Prevention is better than cure, they say.