On the issue of financial safety, one of the major challenges is to put in place a plan to fund the child's higher education just when heshe is going into the 20s, and then when heshe is ready to get married. According to financial planners and advisors, one of the main hurdles to execute the plan is the rate of inflation which is always estimated at the start of the plan but rarely the estimated rate and the actual rate match. On top of this, the rate of inflation for education cost is mostly higher, in the range of 12-15%, compared to the consumer inflation rate which is currently hovering around the 5% mark. The cost of wedding too, according to some estimates, is also rising at an annual rate of about 20%.
So by common logic, if you are saving for your child for a particular course or stream, and you are getting a return of say about 10% annually, by the time your child is ready for higher education, the corpus you would build will not be enough. This is because while your corpus rises by 10%, the actual cost of your child's education rises at the rate of 15%. Thus there would be a gap of about 5 percentage points every year. The same is true for hisher wedding which could be 15-20 years in the future.
As a solution to this problem, financial planners and advisors suggest a twin strategy. For one, you should start saving for your child as early as possible. And secondly, put in a large sum of the savings into equity mutual funds, or if you are experienced enough about investing in stocks, then into equities. Historical data show that over the long term, 15-20 years, equities have returned more than the rate of inflation while bank deposits (FDs and RDs) just about match that rate or at times even fall short. Now if you invest in equity funds, you can reasonably expect to get a 15% yearly return while in bank FDs you can expect to get about 8%. Now if you put Rs 10,000 every month in RDs that gives you 8% per annum, your total corpus, when your child is 20 years old, would be about Rs 59 lakh. Compared to this, if you manage to get 15% per annum by investing in equity funds, the cor pus would be more than 2.5 times what you would get from your FDs.
Starting early is another thing every parent should be careful about which would help them leverage the power of compounding as there is a high cost for delay, financial planners said.
With rising inflation, often parents face the daunting task of saving that extra amount for their child's future. Having a disciplined approach is the key to address this issue. Pay yourself first should be your mantra. Investing is `delayed consumption'. So consider at least 10% of your take home pay as an `expense' and treat the same as `sunk cost'. In this way, you are channelizing some part of the expense for `investment'. And a regular SIP, no matter what the amount is, (which can be as low as Rs 1,000) be considered, so that on a rainy day, this `sunk cost' becomes your `friend in need.
Another trick to build a large corpus for your child is to invest all the money that your child gets during festivals, birthdays and other ceremonies. It's a good strategy to invest the monetary gifts in MF schemes, especially equity funds, if the investment horizon is in excess of five years. You can initiate the investments under the child's name with you as a guardian.Birth certificate as proof which will be required. More importantly, do initiate the investments with a goal and time horizon. The framework is as important as the execution process.
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