Every child is unique and so are their dreams. That’s also the reason why you should plan the future of your children differently depending on their needs. Same is true for the investments for your children’s future. Here is a brief roadmap to guide you.
Recognise the ever-widening choice of professions
The scope of educational opportunities available to your child is vastly different from what was available to you as a student. A lot of non-conventional disciplines outside the traditional favourites of medicine and engineering, such as sports and creative arts, have found favour. As you set out to make financial preparations to secure the future of your children, you need to be ready to modify your plans.
Establish initial targets, modify them later
You certainly don’t know what your young ones would want to be when they are 18-year-olds. However with the passage of time, you do get an idea of the aptitude and interests of your children. And to fulfil their interests, you need to get to start investing early so that the money gets enough time to grow and harnesses the power of compounding.
To begin with, find out the target cost. You can fine tune it as your child comes of age and has an idea of the profession he or she wants to pursue. Let’s say, you plan to save Rs 20 lakh over 18 years and expect a return of 12% annually. Then, you should start a systematic investment plan (SIP) of Rs 2,800 per month in an equity fund. If, 13 years down the line, you realise that you need to up your corpus by another Rs 5 lakh, you could consider increasing your investment by Rs 6,200 per month to Rs 10,000 per month to match your requirement*.
Establish separate mutual portfolios for each child
After having established the needs of your children, you need to ensure that you have separate investments for the need of each child. The reason why you need to have separate investments is that there is a possibility of overdrawing for the elder child from a common pool of savings for children. Parents who typically end up doing that also eventually make premature withdrawals from other savings, typically those related to retirement, for their younger child. Many of them take loans to bridge the shortfall and get saddled with a repayment burden. Either way, it puts remaining goals in jeopardy.
Prepare for the need for money at different times
A critical part of saving for your children’s future is to find out when the various goals would be due. For instance, when your elder child is moving into senior school, your younger child might just be due for school admission. Depending on the timing of the needs, not only would you have to plan your investment, but also have a plan to keep the money ready for use.
This aspect becomes even more critical for distant needs like higher education. Having invested in higher risk-higher reward equity funds you may need to gradually move the money away to lower risk debt funds 2-3 years before maturity. You may consider doing this to secure the gains made from equity investments, and ensure that travails in the equity market doesn’t prevent you from liquidating your investments. For regular expenses in higher education, such as college tuition and hostel fees, you could consider parking the money in liquid funds. The tweaking of investment plans due to firming up or change in professional plans of children that we mentioned earlier would also require you to modify your preparations on this front.
For a mutual fund investor, having started the investment journey with only his or her needs in mind, securing the future of children is more about smartly using the qualities and facilities of mutual funds. As always, mutual funds investments are again up to the task to help you meet these needs too.
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.
An Investor Education Initiative