A wise investment plan may help you secure a bright future for your children.
YOU may want to give the best to your children, but lining up the facilities — properly and prudently — is no kid’s stuff. And when it comes to financial planning for them, it’s even more difficult, particularly in the light of rising inflation rate and increasing cost of education and health services. However, if you can account these factors into your calculation before you invest on behalf of your child, you can make the exercise less burdensome and productive. Here’s a guide on the best possible avenues where you can put your hard-earned money and secure a bright future for your children.
- START EARLY FOR LONG TERM GAINS
Financial Planners hold the view that with ever increasing cost of healthcare and education, the significance of planning for your child’s future has acquired new dimensions. Today, it’s not only about buying an insurance policy but also investing in financial products which give good returns when your children need them the most. Of course, these costs cannot be met just from liquid assets, and hence require methodical planning. The most important thing to keep mind is the objective of investment before taking any decision. One of the best ways is to create a bucket for each of the objectives. This will ensure that you do not deviate and miss the objective. Accordingly, investments need to be done depending upon the cash flow requirements at regular intervals. You should also provide for contingency in case of sudden death of the sole bread earner or for some unforeseen events. Since both the needs will arise at different points in time, two separate buckets will help. Age definitely makes a lot of difference. The earlier you start, the better. So, you can choose the investment product depending upon your need — whether it is to meet the cost of quality education or good marriage.
- ASSET ALLOCATION WORKS BEST
Financial Planning is important for every individual at every stage of life, especially when you have children. Financial planners hold the view that it is an ongoing process which needs to be reviewed periodically to maintain proper asset allocation mix to meet your goals. The recommended instruments for your child’s portfolio are equities, insurance and fixed income investments. Financial Planners allot a weightage of 30% in direct equities, 20% of SIP in equity MF, insurance 25% (child plan and term plan) and fixed deposits and bonds 25%. Insurance acts as a buffer and meets contingency in your planning, in case equity investments do not provide adequate returns and fixed income acts as a base on which exposure is taken in other risky asset classes. Analysts believe that the asset allocation can vary with time and you should diversify your child’s portfolio accordingly. For instance, if your child is young, say five years of age, and you are planning for his higher education or marriage, you can have a higher equity asset allocation. Similarly, if he/ she is 15 years’ old, probably you can have a moderate portfolio with a combination of both debt and equity for meeting his higher education needs. If it is for wedding, he/ she can have an aggressive portfolio with higher equity assets as the investment will work for a longer period of time.
- ACCOUNT FOR INFLATION
It’s a known fact that inflation reduces the purchasing power of money and no matter how well you plan, there are chances that the fund you have marked for your children may be insufficient for their future needs. Imagine, the child is five years’ old and you estimated a cost of Rs 10 lakh for his higher education. The value of Rs 10 lakh will be much lesser when the child actually needs the money, which means the requirement will be far higher. Any financial planning without factoring in inflation is like a half-baked cake which will be tasteless. Another concern is the uncertain and volatile investment climate being seen today. Earlier, parents had the comfort of investing in assured return schemes offering 10-12% rates. Since then, these rates have halved and even then the future of assured return schemes, as they exist today, is suspect.
- INVOLVE CHILDREN IN FINANCIAL MATTERS
Financial Planners believe that as a parent, you should inculcate the concept of savings and value of money in your children. You need not start straight with investment products as awareness is important. It’s important to involve children as you’re planning for his/ her future and you need to understand their interests. You also need to make them responsible for their decisions and plan their career.
- NO CHILD’S PLAY
- Create individual buckets for your objectives. This will ensure you do not deviate and miss the objective
- Recommended instruments for your child’s portfolio are equities, insurance and fixed income investments
- An ideal portfolio allocation can be 30% in direct equities, 20% in MFs through a SIP, 25% in insurance (child plan and term plan) and the rest in FDs & bonds
- Financial planning should factor in inflation, otherwise it will be like a half-baked cake which will be tasteless
- Inculcate the concept of savings and value of money in your children
