How to invest for your children
The first child in a family brings a lot of joy and happiness. The new parents undergo a sea of change in emotions. But with this also comes the realisation of responsibility towards the newborn. Parents primary aspect of their life would become the protection of the child.
A lot of dreams emerge with the child being in the centre of those dreams. From here comes the need to create a financial base that would ensure the future of the child in all respects.
The flow of Information
A lot of advice flows in when the issue of saving for the child crops up. Advice comes from elders, friends, media and financial advisors that you are in touch with. But most of the time the advice is biased.
Elders’ advice would be based on what they had done in the past. Friends, who advice, have mostly sailed the same boat that you are currently in, and advisors advise you the product tag the fancy name.
What goes into your mind when an Investment Advisor talks to you about Child’s higher education or savings for his/her marriage. You might have been told about something that insurance company offers, they have some fancy named product we find that these are just sales talk and they are nothing but stupid products available in the market.
At times we also find that parents or grandparents take policy in the name of their kids. Emotional sales takes place where investors take emotional decisions. If a parent takes insurance in the name of the kid, would he feels financially unsecured in case god forbidden anything goes wrong with the kid. The correct approach is, if anything goes wrong with bread earning parent, the kid is unsecured and not the other way round and hence the parent should be insured. Being in an emotionally charged state, a lot of parents are influenced by this advice, on the basis of which a decision is made.
So conclusion is, NEVER BUY INSURANCE in the name of your kid. Always take term insurance so that in case anything goes wrong to you, the kid will be financially secured.
Invest in Insurance or Mutual Fund?
So, the question is what to do where to invest, how to save, parents are aware that for the child’s higher education there is a time horizon of more than 15 years (in case the child’s age is less than 3 years). The second major need, that is, the marriage would have an even higher time horizon.
The objective is very simple: invest in such a way that investing the money over this horizon makes maximum returns. The focus has to be to find the best place to invest the money. A simple study of different ‘asset classes’ would make it clear that over such long durations the maximum return potential is offered by equity investments.
The BSE Sensex has grown from a base of 100 in 1979 to 19,000 in 2010, translating into an annualised rate of around 18 per cent over the last 31 years. In future over longer horizons a 15 per cent annualised return from equities is a realistic expectation. In most other options like traditional insurance products or fixed income products the returns would be in the range of 6-9 per cent.
A lot of insurance guys would point out that ULIPs too invest into equities, but they forget to mention that there are very high upfront charges that are cut when you invest in ULIPs.
As far as returns over the long term are concerned mutual funds would come out a winner. Also it is never advisable to buy a product which is a mixture of two products, for sure the charges going to be high for these kind of products.
Mutual funds or direct invest in stocks? So how does one go about this investment?
In most cases parents prefer to set aside a small sum each month towards creating a fund for the child’s future. So the best option would be to invest into equities through a systematic investment plan (SIP) in mutual funds investing into direct equity too is an option, but is recommended only if you have sound understanding of stock market investing.
The immediate question that pops up is which mutual fund should we pick? A lot of mutual funds offer children-specific schemes. But in our opinion, the regular diversified equity oriented funds are better than these children specific schemes.
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Getting to know the basics
When the parents think about the child’s future, the primary thoughts are about their education and marriage. Most parents are aware of how expensive higher education has become today.
This is the primary reason that most of them want to start saving so as to create enough resources to give their child a dream education. This may even include the higher education abroad. The other question that arises is that how much you should invest each month.
Take for example, if you are young parent of a year old child, your plan may be like:-
From the above case it has been found that for the child of 3 years total amount needed for just 2 goals i.e. for Education and Marriage total amount required is around 95.70 Lakh
To insure the child future total insurance requirement for bread-earning parent should be around Rs.30 lacs(Term Plan) as it is assuming that the insurance proceeds should be invested in safe investment where 5-6% returns can be achieve in 23years.
This is just for illustration purpose and things may change depending on other conditions and factors.
The right time to withdraw your money is?
Say around two years before you would need the money you should look at withdrawing a part of the investment and park it in safer assets. You would not need all the money at one go. Each year you will need some amount. So stagger your withdrawals accordingly.
It is the dream of every parent to provide the best for his/ her child. There is no bigger gift than the gift of knowledge that parent can give their child. As your child grows big enough to understand you should make her/him take part in creating the fund for her/his future.
The knowledge to manage money responsibly and wisely would go a long way in shaping the future of your child
The 10 ideas may help you secure your child future:
– The first thing that the parents need to realise is the clear objective. Building enough financial resources, that would secure the financial future of their children. In this a critical element is planning for risk. The risk is that of the life of the earning member.
– The life insurance cover taken should be sufficient to also take care of the child’s future. Once this is done, the next step is investing for the child’s future needs.
– Don’t caught into Emotional Selling
– Do your home work to find out the expected amount of money required on your kid’s education and /or on marriage inflation should not be ignored while calculating future cost of education or marriage.
– For young parents, you may consider a combination of SIP in diversified equity fund and not so risky product. Remember that equity is good when you are planning for long term goals.
– Buy a Family Health Insurance.
– It is your dream to give best to your child but don’t sacrifice your retirement investments. Your junior may have lots of options to cover college expenses. But what alternatives to retirement do you have? Think Your Way To Wealth
– I realize that everyone needs a budget, but if you don’t have one in place, now is the time to get it working. The good news is that babies don’t cost as much as society tells you. The not so good news is that, as money grows tighter with a little one in the house, not having a written cash flow plan in place can get you in trouble.
– If both of you die without a will, the courts will decide who cares for your child (depends on conditions). Is this what you want? Make a will so you can name the guardian, who can take care of your child and your funds for your child.
Approach you can adopt for grown ups
– For parents whose kids are 10-15years of age, have balance approach in your investment style.
– For parents whose kids are now ready for higher education or about to get married in short time to come, investments meant for them should avoid equities and should be done in either debt based funds or Fixed Deposits