Skip to main content

Investing for your children future needs

The arrival of a baby is probably the best thing that can happen to a family. The initial euphoria, however, wanes as the parents start pondering on issues like financing the child's education and marriage when she grows up. This is especially true for Indian middle class families struggling to cope with soaring costs. Investing for a child's future is, therefore, an issue that parents should devote a lot of time and effort towards. The following is a list of six financial instruments which parents can consider for building enough financial resources to take care of their child's future.

Savings account: This is the most used and least effective way of investing for a child's future. Savings account offers the lowest return among all financial instruments. In fact the return is so low that it cannot even offset the erosion in value caused by inflation, let alone generate a real return.

Stock market:
The Indian economy is the fifth largest (in PPP terms i.e Purchasing Power Parity) in the world.  There is consensus among analysts regarding the strong positive medium and long term outlook of the Indian economy. The Sensex has grown from a base of 100 in 1979 to 18,000 in 2010, translating to an annualized return of 18% over the past 31 years. Investing in index funds is an option that is expected to generate handsome returns while mitigating the risk arising out of investing in individual stocks. Additionally, stock market investments are highly liquid and have low transaction cost. However, to succeed in this investment, extensive knowledge of financial markets is necessary. Parents not possessing that knowledge can still invest in them, via the financial instrument illustrated next.

Mutual fund:
A child plan mutual fund usually has both stocks and bonds in the portfolio. When the stock market goes up, the equity (stock) portion of the fund generates returns. When the stock market goes down, there is the debt portion which generates assured (assuming the debt issuer doesn't default) returns. There is also tax advantage associated with investing in mutual funds which are taxed only at maturity.

Insurance: The market is flooded with a number of child insurance plans offered by firms like LIC, Metlife, AVIVA and HDFC, among others. Besides providing risk cover that is the core requirement of a long term financial plan, the child insurance plans also provide tax advantage. The risk cover in these policies is on the earning parent(s) and not on the child. The plans work on the beneficiary concept, where the beneficiary is the sole person to receive the benefit (usually the child). The fixed term payment and maturity benefits continue irrespective of the death of the life insured. Additionally, many insurance companies offer the advantage of customizing the policy to the requirements of the child.

ULIPs: Unit Linked Insurance Policy (ULIP) provides the dual benefit of life insurance solution as well as investment of the policyholder's fund in the equity market, thus generating good returns at reduced risk. When the stock market moves northward, the value of the policyholder's investment fund increases, while during a downturn, he has the insurance in hand. Policyholders can choose from different types of funds like equity funds, fixed interest funds, cash funds and balanced funds, depending on their financial goals. They have the option to switch funds in a policy for a limited number of times. There are, however, high upfront charges including fund management fees, cost of insurance coverage, commission expenses and premium allocation charges. This is where mutual funds score over ULIPs. Currently ULIP products are undergoing a revamp of sorts post regulations introduced by IRDA and is expected to be better and more transparent.

Commodities: Investing in commodities is done by some families, especially for a girl child. It is a good idea because of two reasons. One, returns generated by commodities in the current scenario is higher than the inflation rate. Two, commodity based funds are on the anvil and is set to add another dimension to investors' portfolios. However, care should be taken to ensure that there are no conversion costs. For example, investors should buy gold coins and biscuits and not gold ornaments.

How much to invest for a child? Parents can ascertain the amount they are saving every month and based on that they can determine the quantum of monthly investment to put in. Alternatively, parents can estimate the total amount of money required for their child when she grows up, and then back calculate the monthly installment. A combination of the two approaches is also used. Once the amount of monthly investment is determined, parents can decide on the type of financial instrument(s) they want to use.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now