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.
Selecting the most effective plan
It's hard to recommend the best investment option since the requirements and needs of each product differ. However, there are some general guidelines you can adhere to.
Set up Child Goal Amount
To reach the specific goals that your child has set, calculate the possible value of the amount needed after adding inflation.
It will allow you to save enough money for the long-term goal of investing in equity because they offer better inflation-adjusted returns than other assets.
For instance, an event that costs 25 lakh today will cost around 60 lakh 15 years from now, at an inflation rate of 6 %. Suppose equity investments produce a return of 12 % over the coming 15 years.
In that case, you can estimate the savings per month. You can also calculate the savings per month you must make to fund your child's college education. Approximate 21.62 lacs invest one time or monthly SIP 12,000 for achieve your child financial goal.
Child Investment Plans
Life Insurance Plan
They are the most well-known children's investment plans on the market. Majority of the intermediaries, like Banks or agents, first suggest child insurance plans. Because their popularity is not based on the product's benefits but on the commission that intermediaries earn.
Children's ULIPs (Unit Linking Insurance Plan):
Cost of the premium is deposited into a fund of money invested in equity and debt instruments. The risk is reduced if the plan is purchased for a long period (more than 10 years). The returns can be substantial because it's an investment product linked to the market.
Child Endowment Plans:
The amount paid is only invested in debt-related products. The potential returns might not be as great as those of Child ULIPs. These plans are suitable for short-term planning (less than 10-years).
It is not recommended to combine life insurance with investments since the expenses for this type of plan are much greater.
The aim behind insurance plans for children is to Insurance Child investment plan is first to give protection needed in the event of an eventuality and then to return, not the other way around.
Fixed Income Products
Fixed return products such as Government Schemes or Banks FDs such as Sukanya Samriddhi Yojana, Public Provident Fund (PPF) have advantages and drawbacks.
The benefit of these schemes is the guaranteed returns & capital safety.
Taxation is one of the major drawbacks of these investment options. These investments are taxed annually, which means you must pay tax each year on the interest you earn, regardless of when you decide to withdraw your investment and at the tax rate.
Public Provident Fund -PPF
Public Provident Fund is a small savings scheme that comes with security from Govt. of India on the investments and the interest. You can open a PPF account at any major bank or post office.
PPF account is locked in for 15 years, so you can't withdraw it whenever you'd like.
However, the ability to withdraw partial amounts is under certain conditions and conditions and only after a certain period.
Public Provident Fund is one of India's most reliable Child Investment Plans for investors with low risk who are looking for safe yields after a 15-year timeframe. The interest earned from PPF is tax-free. PPF investments PPF is qualified for tax exemption under the law of 80C, up to 1.5 Lakhs per year.
Sukanya Samriddhi Yojana – SSY
The legal guardian or the natural person can open an account for the girl child under ten years old. A depositor can create and operate only one account under the name of a girl according to the scheme's rules.
The legal guardian or the natural parent of the girl child is permitted to access the account for two girl's children only.
Read More Detail for SSY Scheme
Mutual Fund
When looking for the best strategy for investing with mutual funds, similarly is children's investing process.
The best part is that minors can participate in any mutual fund scheme offered for adults.
Some schemes are specifically designed for children and are generally referred to under “Hybrid” or “Child Care Plan” or ‘Children's Gift Fund.' They are typically constructed as a mix of fixed-income equity and securities with 60-70 percent exposure to equity stocks.
Don't necessarily select Children Gift Fund (CGF) MF schemes for children.
Gift Funds invest in a combination of Debt and Equity Instruments.
The funds must be used for long-term objectives. When investing in such an investment, one must avoid market volatility in the short term and concentrate on the return which will be realized within the next few years.
The Right Mix Asset Allocation
When you are planning for your child's future, it is best to stay with large-cap funds because they invest in established top-tier businesses and are less volatile.
They offer reasonable returns when equity markets are up and less unstable when equity markets decline.
A small amount of risk of mid-cap funds, which have been known to provide rapid increases in their performance, along with high-risk funds like thematic funds, is a great way to maximize return.
Certain investors are very cautious, and others are more aggressive. Be sure to explain to your financial advisor precisely what kind of risk you're willing to take for your investments. Plan your portfolio accordingly.
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.