A new breed of financial planners are now advising people to gift investment products as gifts instead of physical items. And for money sent as gifts, they are advising people to put it in a bank and then issue a cheque to invest in a financial product. By doing so, they are turning around the whole idea that the value of physical gifts will depreciate over time, but if the gift is an investment product its value is, of all probability, will appreciate over the long run. Such gifts have the potential to turn out to be a gift for a life time.
The trend is picking up among people, and more so among the grandparents who are looking to gift something to their grandchildren, the value of which the younger lot could realise in future, financial planners said. People are realizing that if they gift an investment product to a child who has long years in front of himher, that is with time on hisher side, compounding will make the value of that gift multiple times higher when heshe needs it in future.
In case of a child, this strategy of gifting an investment works very well. This is seen working even better if a child is gifted with a systematic investment plan (SIP) in an equity mutual fund mainly because of the long years that the child gets in front of himher.
Financial planners say under such a plan, there could be two dif ferent ways of invest ing. One of the ways is to start investing in one or a few funds, and when the child gets any money as a gift that money goes into those funds. The sec ond route is to start an SIP in the name of the child and continue with the same. In both cases one the person handling the investment should be careful not to touch the gifted investments till the child grows up to be an adult.
Such gifts could continue for 10, 15, 20 years and the power of compounding kicks in to build wealth for the child over those long years, financial plan ners say .
An advantage of such a decision, that is to gift an SIP in the name of a child, is that such investments have great sentimental value for the parents. So except under critical needs, those invest ments are not touched. So by default such an investment becomes a long term investment for the child. And when the child grows up, heshe can use that money for hisher higher education, wedding or any other purpose. In turn such an investment also lightens the financial burden on the parents when the child needs money, financial planners and advisors said.
There are a few caveats at tached to such investments.
For one, before making such investments, the per son who is investing on behalf of the child, should do some due diligence on the fund that heshe is looking to invest. The basic rules of long years of sound track record for the fund house and also sound financials like large networth for the asset management company should be looked into. Although the child usually has long years in front of himher for the money to grow, but that should not prompt one to invest in highly risky equity funds.
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