Plan it right,from cradle

What are the expenses that I need to provide for my child?

Right from when your child is born,the expenses never stop. Apart from the basic expenses such as living costs boarding,lodging,food,clothing and primary education,there are discretionary lifestyle related costs hobbies,private tutors,sports lessons,coaching classes for entrance tests,mobile phones,internet connectivity and computer costs. As children grow old,their need for pocket money also grows.

Then,once they hit college-going age,there are the obvious costs of tuition. Current rates of inflation in the education space are between 5 per cent to 20 per cent per annum. That could mean that for a child born today,the cost of college education could be at least 200 per cent higher by the time they hit 18 years of age.

Thereafter,there could be costs associated with post-graduate education like an MBA or higher studies for specialisation in a foreign university. Finally,there could be marriage expenses,by the time your child is ready to start their own family.

All told,given the 20-year cycle of expenses,and the rising costs of meeting these expenses,it is estimated that it could take up Rs 1.5 crore to meet all these costs towards bringing up a child.

When should I start planning for my childs financial future?

As quickly as possible! Raising a family and children is expensive. So you want to start early. Many want to be parents start even before their child is born. Others start at their birth.

The reason to start early is that you will have a long time ahead of you and your child to accumulate returns on your savings and investments. So,your money can work uninterrupted over a longer duration to grow into a large corpus by the time your child is ready for major expenses such as college or marriage. By starting early,you can take advantage of compounding of capital. Even if you start with a small sum of money,invest early and regularly for your child.

Please also keep in mind that many of expenses related to raising a child will be contemporaneous with your other major financial goals such as buying a car,buying a house,planning for your retirement and taking care of your aging parents. By starting early,you can avoid being under prepared and being in a crunch situation when all your financial goals need to be met simultaneously.

What investment criteria should I use to invest for my children?

Two things stand out:Think long-term. You need to think in terms of decades,because the big-ticket financial goals of college and marriage are likely at least a decade away for a young child. So,think of putting money for the long-term.

The best instrument for this is investing in equities,if you are skilled enough to pick stocks,or preferably invest in equity mutual funds where an expert fund manager can invest on your behalf.

Capital appreciation. You should be willing to take on a little bit of risk to earn a higher reward,as your childs financial goals are at least a decade away. In this situation,you must target capital appreciation that is higher than the rate of inflation. Assuming long-term inflation in India is going to average about 5 per cent,your after tax returns must return more than amount,otherwise you will be unable to adequately fulfill your childs funding goals.

Avoid opening a fixed deposit for a new born child,or buying any kind of fixed income instrument like a debt fund or government bonds. Invest in instruments that will offer you long-term capital appreciation.