Now that your bundle of joy is in your arms, you must already be thinking about his or her future. Being an existing mutual fund investor, here’s how you can extend your trust in mutual funds to planning for your child’s future as well.
Start a bank account in the child’s name wherein you could deposit cash gifts received from relatives and friends. These would be useful while saving up to invest for child’s future. Every penny counts. For instance, if your child receives cash gifts of Rs 50,000 in the first year and you invest this amount in an equity mutual fund which delivers 12% return annually, you could, in 25 years, build a corpus of close to Rs 8.5 lakh*.
Enhance tax-savings investments
Early in their work life, people usually direct a significant portion of their investments towards tax-saving investments, such as equity-linked savings schemes (ELSS). While you might already be investing in them for distant needs like retirement, you could do more of the same and invest in ELSS separately for your child’s distant needs of higher education and such needs.
For instance, if you invest Rs 10,000 per month in an ELSS for 18 years, at 12% per annum, you could have accumulated over Rs 70 lakh at the end of your investment period*.
Start debt fund SIPs for primary school expenses
Usually, your child starts going to school at the age of 3-4. At that time, you will need money for his or her admission and other related expenses. You could consider starting a systematic investment plan in suitable debt funds with a good track record. Ideally, they should be the debt funds you are already invested in so that you won’t have to track too many investments.
For instance, a SIP of Rs 3,000 per month in a debt fund for three years, growing at 9 % per annum, could amount to Rs 1.22 lakh*—handy during a child’s admission.
Hybrid funds for middle and high school expenses
Your child’s expenses will keep rising, and you need to continue planning for them. It could be a cricket coaching class or preparations for competitive exams. For needs like these, hybrid funds such as balanced funds could be of use. Balanced funds invest in both equity and debt, and so could help your money grow and race ahead of inflation without the volatility of pure equity funds. In terms of returns, the best performers are often at par with pure equity funds. If you had already been investing in such funds, you can make fresh investments for your child’s needs.
Harness the growth of equity funds for your child's higher education
Equities are usually considered ideal for needs such as retirement and the kind as they are known to deliver superior returns in the long run. However, you could also explore this avenue while investing for your child’s education. Apart from ELSS, you could supplement your mutual fund portfolio with large-cap funds and as the investment grows in size, gradually incorporate mid-cap funds.
Along with investing across asset categories, you also have to make sure you track the performance of your investment and accordingly reallocate, if needed.
Start small, increase it over time
Let your child’s dreams not intimidate your investments. The important thing is to get started early, even if it is with small amounts so that you can save more in the long run. For an engineering course that would cost Rs 55 lakh after 18 years, you would need to invest Rs 7,800 per month, assuming a growth of 12% annually*.
Here, you could consider top-up SIP facilities offered by mutual fund house which gives you an option to increase the amount of the SIP instalment by a fixed amount at pre-determined intervals.
Being an existing mutual fund investor who trusts mutual funds, it is not particularly difficult to replicate the experience to financial preparations for your child’s future, as well. If you invest regularly after setting sights on the various needs, you can spend more time with your child without worrying about his or her future.
This article solely provides general information on financial planning and is not for solicitation of investments by L&T Investment Management Limited and/or L&T Mutual Fund. The information in this article should not be construed as providing investment advice and does not seek to address specific investment objectives, financial situations and particular needs of any specific person who may receive this information. The recipient of this article, therefore, should rely on his/her investigations and obtain professional advice (legal, tax and financial) before taking any investment decision, and should understand that statements made herein regarding future prospects may not be realised.
*Calculations in this article are based on assumed rates of return on investment and actual return on your investments could be more or less. Expenses, if any, have not been factored into the calculations and they could reduce the returns on investments. Calculations shown here do not in any manner imply or suggest performance of any scheme of L&T Mutual Fund.
Investments in mutual funds and secondary markets involve inherent risks. There can be no guarantee against gain or loss that would result from following any suggested asset allocation nor can there be any assurance that an objective will be achieved. Past performance may or may not be sustained in future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. CL02258
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