Every parent wants their child to thrive, and financial security plays a vital role in achieving that. Through smart investments, parents can empower their children’s financial future and equip them for success in the years to come.

In this article, we will explore various investment options suitable for parents, highlighting their benefits, considerations, and strategies for optimization.

Start Early, Plan Smart: Securing Your Child’s Future

The earlier you start, the more your investments can grow to support your child’s future.

However, simply starting early isn’t enough. It’s crucial to consider the ever-rising cost of living. Factor in inflation when determining how much you need to save to achieve your child’s financial goals, whether it be higher education, a comfortable start to their career, or other aspirations.

Once you have figured out the goal you want to achieve, you can determine the amount you must save to achieve your goals.

Once you have a clear vision of your goals, you can then determine the investment strategy that best aligns with your budget and risk tolerance.

By taking a proactive and informed approach, you lay a strong foundation for your child’s financial well-being.

Selecting the most effective plan

Choosing the optimal investment strategy presents a challenge due to the varying requirements and preferences associated with each option. Nonetheless, there exist overarching principles that can guide your decision-making process.

Factor in Inflation: Setting Your Child’s Financial Goal Amount

1. Account for Inflation: When setting your child’s financial goal (e.g., college education), remember to factor in inflation. This is the rising cost of living over time, which can significantly impact the future value of money.

2. Consider Equity Investments: To combat inflation, equity investments (like stocks) may be appropriate for long-term goals. Historically, they have offered higher returns than other asset classes when adjusted for inflation.

3. Example: Let’s say a specific goal costs ₹25 lakh today. With a 6% annual inflation rate over 15 years, it could cost around ₹60 lakh in the future. If equity investments potentially return 12% annually, you can use this information to estimate your monthly savings or lump sum investment needed to reach your goal.

In this scenario, you can determine the monthly savings amount. You can also calculate the monthly savings needed to finance your child’s college education. Approximately, investing a lump sum of 21.62 lakhs or initiating a monthly SIP of 12,000 can help you reach your child’s financial goal.

Remember: This is a simplified example, and professional financial advice should be sought for personalized investment strategies.

Choosing the Right Investment Plan for Your Child’s Future

Planning your child’s future is crucial, and selecting the right investment plan is essential. Here’s a breakdown of various options available in India:

Life Insurance Plans

• Child ULIPs: These combine investment and insurance features. The premium is invested in stocks and bonds, potentially offering higher returns but with market risk. However, their combined cost can be high.
• Child Endowment Plans: These invest solely in debt instruments, offering lower risk and potential returns compared to ULIPs. They are suitable for shorter-term goals.

Important Note: Combining life insurance and investment might not be the most cost-effective option. Consider prioritizing pure insurance needs separately and then focusing on dedicated investment options. Remember, the primary purpose of insurance is protection, not returns.

Fixed Income Products:

• Government Schemes (e.g., Sukanya Samriddhi Yojana) and Bank FDs (e.g., Public Provident Fund (PPF)): These offer guaranteed returns and capital protection but may have lower potential returns and tax implications.
• PPF: This scheme offers guaranteed returns from the government and tax benefits, making it a good option for long-term savings with low-risk tolerance. However, it has a lock-in period of 15 years with limited withdrawal options.
• Sukanya Samriddhi Yojana (SSY): This scheme is specifically designed for girl children under 10 years, offering attractive interest rates and tax benefits. However, it allows account opening for only one girl child per family and has specific withdrawal rules.

Mutual Fund

• Minors can invest in any mutual fund scheme available to adults.
• While some “Children’s Gift Funds” exist, they are not necessarily the best choice. These funds invest in both debt and equity, which might not be ideal for long-term child goals.
• Focus on your child’s long-term goals and choose a fund based on your risk tolerance and investment horizon, not solely on the fund name

The Right Mix Asset Allocation

While large-cap funds offer lower volatility and stability compared to mid- and small-cap funds, solely focusing on them might not be optimal for maximizing returns:

• Diversification is key when building an investment portfolio. This means allocating assets across different asset classes (e.g., equity, debt) and within each class (e.g., large, mid, and small-cap stocks).
• While small-cap and thematic funds carry higher risk, they also have the potential for higher returns over the long term.

Require Document for a minor

Two essential documents are needed to open an account in a mutual fund for minors. First, documents that prove relationships between the child’s parent and guardian are required.

In the case of a parent or guardian, it is necessary to present the birth certificate. Other documents that state parents’ names is enough. If it is another person having the same name, a copy court order is necessary.

Additionally, the minor’s birth certificate or proof of age is mandatory. In addition, the minor’s parents or guardian will need to comply with KYC as per the rules. If the minor is deemed an adult, the whole KYC process must be conducted in her name.

Selection Scheme in Portfolio

Suppose you’re looking for a long-term look at the MF targeted schemes based on the following factors.

Examine the fund’s long-term performance. Consistency is a major factor in the long run. It is crucial most when the final value of the amount of money is considered.

The performance of funds in the family could be different because they are run by other managers and possess different portfolios.

Therefore, please carefully review the scheme’s performance, its investment portfolio, and the investment strategy the scheme adheres to.

Approach

After estimating the savings per month needed and identifying different MF plans, choosing the best strategy is important.

SIPs or systematic investment plans (SIP) require you to invest an amount fixed in money over some time instead of investing a massive lump amount.

This kind of investing is suitable for people who cannot invest in lump sums but want to invest consistently.

In this way, you do not have to experience the fluctuations and highs in the markets. Instead, the price that you invest is figured out over time.

The idea behind SIPs is that investors will automatically purchase more units when the market is down. Additionally, they buy fewer units when the market is rising. So, the price per unit will decrease over time.

It aids in saving money and doesn’t force the need for money into a flurry at the last moment.

Additionally, a portion of a child’s money in birthday gifts can also be invested in MFs.

Review Portfolio

You will have a time frame of 15 to 20 years in which you can build an asset to provide for the child. Be sure to track your investments and speak to your finance expert at least once a year about the same.

It is essential to be aware of the status of your investments at least once every year, at a minimum.

What happens after child is 18?

When minor complete the age complete KYC Process and required documents to alter the status on the folio from minor to major. In addition, KYC acknowledgement letters from the unit owner becoming major must also be provided.

Be aware of your objectives and plan for the future:

 If you want to be prepared, you should know the amount you’ll need for your child and the time frame (for education and marriage, among others). When you estimate the amount, you should consider the expected inflation rate.

Know the product and the cost involved:

Insurance companies can be liable for certain charges that need to be paid by the client. Therefore, you must compare the various insurance products and pick the most appropriate one.

Conclusion

Higher education for children is among the top financial goals for parents. With the cost of quality education growing fast, it is essential to start early and remain committed to your financial plan to help your child achieve their goal. Mutual funds are the best investments for your children’s education planning.