Planning for kid’s financial future

Long term horizon gives you flexibility to choose risky investment options

Written by Adhil Shetty | Published:October 10, 2011 2:25 am

Are you a proud and careful parent? It’s a simple question to answer. The fact that you are reading this article is proof in itself. Not every parent is serious about the distant future of the child as planning is only visible in their intent and not action. The reason you cannot turn a blind eye towards his or her future capital requirements are so many. Some of them are exponentially increasing education cost,persistent inflation,increasing rent,and costly health care services.

Factors to keep in mind before planning

Planning for your child’s future is very crucial to your child’s well-being. There are certain points which one should keep in mind before choosing the investment options as it will help you generate optimum capital in future.

* It’s a long term capital requirement – You need the money after 18-20 years. Longer time frame gives you the flexibility of choosing risky options and you have enough time cushions,if you change your strategy mid-way due to unavoidable

circumstances.

* It’s a large amount – If you opt for engineering,MBA or any renowned professional course today,you need approximately 8-20 lakhs to complete the education. If we take only inflation which is hovering round 10 per cent,a very conservative costing estimate for pursuing the same course will be round 20-50 lakhs after 20 years. It’s a huge sum. This requires careful planning in terms of your savings,investment instruments,and execution.

* It is a certain requirement – This understanding is important for you to invest in a disciplined way. You cannot afford to trade or speculate based on tips and free SMS suggestions.

Options to choose from

Now we have a fair idea of the capital requirement and the timeframe,let’s start exploring the investment avenues,which will generate the required capital in a given timeframe:

* Investment in PPF – One of the safest options of the lot is investment in a PPF account. It has the power of compounding plus the guarantee of assured returns. If you invest around 60,000 to 70,000 per year in a PPF account you will be able to meet most of the capital requirement of your child after 20 years. Since this is backed by Government of India,the PPF is risk free.

* Investment in equity & equity oriented mutual funds – As the time horizon is very large it’s advisable to take exposure in risky assets like equity. It’s a well-known fact that in longer time horizon equity asset class gives the maximum return. The only effort needed from you is researching to find out some good companies to invest in. As it’s about your child the pain is worth taking. One additional advantage which comes with long term equity investment is that capital gains are tax exempt. If you do not have time or expertise to study equity,then you can invest in equity oriented mutual funds. It is easy to find top mutual funds,which have given good returns over a period of time. Select few good mutual funds and start investing in SIP (systematic investment plan) right away.

* Investment in Real Estate/Land – If you believe in invest and forget philosophy,the best option for you is investment in real estate. Buy a real estate property and leave it for few years and watch its value grow. Real estate,in many cases,may give better returns than equities.

* Child Plans/ULIPS/Insurance – There are a lot of child linked plans being offered by various vendors and some of them might cater to your need. While investing in such plans just be careful about various kinds of fee the companies charge for managing your fund. In most of the cases the returns are not so handsome post the management fee. Another point to note is that ULIPs give good returns only in the long term. Never break a ULIP in 3-5 years.

Conclusion

Investing in choices suggested above will definitely take care of your future needs. Taking an early decision will make things easier for you but you need to be slightly careful while taking exposure in equities as it requires knowledge and monitoring at regular intervals. Laying out a proper plan and making a disciplined effort will give you peace of mind as this will ensure your child’s long term needs are met.

Author is CEO,BankBazaar.com

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