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

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Banks tweak ATM strategies

Unrestricted usage of third-party ATMs ends on Thursday The era of free ATM usage will come to an end on Thursday, October 15. Every transaction carried out on another bank’s ATM could cost an account holder as much as Rs 20 and withdrawals will face a limit of Rs 10,000, the Indian Bank’s Association has said in its guidelines. According to the guidelines, banks can offer savings-account holders five free thirdparty withdrawals every month —they can be charged from the sixth transaction onwards. Current account holders can be charged the fees, which ranges from Rs 18 to Rs 20, from the very first transaction. Most banks are convinced that charging current account and no-frill account customers from the word go is a good idea. It suggests that the usage of ATMs by current-account holders is price-insensitive. For others, banks have decided to frame their charges depending on the profile of the customer. For instance, HDFC Bank is allowing its salary account and premium customers an unl...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Women need to plan for Retirement

Plan for Retirement Online       Higher life expectancy, lower pay and fewer work years necessitate thorough planning.   Women have raced ahead of men in various fields but, when it comes to retirement planning, they tend to lag behind. Despite saving a higher proportion of their salary, compared to men, women generally do not take retirement planning seriously. Below are some of the reasons why they should: According to the United Nations Department of Economic and Social Affairs, in India, the life expectancy of women is 69 years and, of men, it's 66 years. Due to this, a woman will need an additional `55 lakh to manage her living expenses (see table).Besides, usually, women work fewer years compared to men to take care of children and family.Further, a recent study by Korn Ferry Hay Group shows that women in India earn 18.8% less than men. Not to mention, a higher life expectancy can also mean higher medical expenses as the likelihood of health ailments such as diabetes, high...
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