Financial planning is about adding a structure to the investment process. First, one must gather thoughts and estimate the corpus requirements. Second, the investor must draft a robust investment strategy (or steps) to achieve the target. And, finally, make the necessary changes to accommodate a change in life circumstances to keep the financial plan relevant.
Goals are not cast in stone, but it is essential to set goals. There will be a need to modify targets, add new ones, or delete irrelevant ones. In other words, change in situations will demand change in plan. And, one such instance is the arrival of a child in the family. As a result, parents must re-look at the financial plan to account for the change in circumstance. Investors, parents, in this case, must invest to save the funds required for significant events like education (school and college), marriage, etc. Let us discuss the top long term investment options for child needs.
Let us address the elephant in the room – when should you start investing?
The answer is simple, the sooner, the better. And there are, of course, significant benefits of early investing.
Take an example where you would like to save Rs 20 Lacs for your daughter’s college fees when she turns 25 years of age. Let us assume a 12% rate of annual return. You will need to invest a principal of Rs3.5Lacs if you start investing on her first birthday.
However, the later you start, the more significant the investment will be and the lower the possibility to make any course correction. For instance, in the same example, you will have to invest Rs7.2Lacs if you start saving from the 10th birthday. Or even worse, Rs 14.5Lacs if you start on her 20th birthday.
|Age of child||Investment||Principal (Rs)|
|(Rs per month)|
The above calculations assume monthly equated investments.
Ever wondered about what is the cost of raising a child until s/he is 18 years of age?
Several factors like your affordability, background, city of residence, etc., influence the total cost of raising a child. We have attempted to estimate, like a few others, and find that the total cost of raising a child ranges anywhere from Rs 30-35 Lacs to Rs 55-60 Lacs.
Now, that is a massive financial commitment. And it would be best if you planned for the same.
The cost estimate includes prenatal care, medical expenses, cost of delivery, vaccination and doctor expense, nanny costs, daycare and school fees, tuition fees, birthday party and gift expenses, extra-curricular classes, vacations, entertainment expenses, games and toys, study gadgets, pocket-money, etc.
Top long term investment options for your child
You have to begin early. Further, given the extent of financial commitment, it is evident that you need a good savings plan. You want answers to some of the crucial asks like:
- Save for a child’s education and marriage expenses
- How to save money to help child set up their own business
- How to secure the future of my child in my absence?
Here are the top long-term investment options for your child.
Child (Insurance) Plans
A child insurance plan is one of the common investment avenues. A child plan can be an insurance or a money-back policy.
In the former, the child will get a lump sum amount at a certain age in case of the policyholder’s death. Payment in tranches is also possible under the plan. In addition, the insurance company waives off any unpaid premium. A child plan will ensure that the child will meet recurring or one-time fees for education.
The most preferred and highly recommended option is to invest in mutual funds through a systematic investment plan (SIP). This investment strategy can help create a large corpus to eventually or on the way meet the desired objectives. Investing in mutual funds is simple, and so is the exit. Further, professional money managers manage mutual fund investments. Hence, continuous monitoring is not required. It would be best if you considered both equities and debt mutual funds for your investment purpose.
While planning for a child, stick to large-cap mutual funds as they invest in well-established companies. Given the volatility in the market, you may also consider balanced advantage funds. These funds manage their investment strategy based on the market valuation. Another alternative is multi-cap schemes that have an established track record. Finally, you may choose to participate passively and invest in index funds only.
Investing in the yellow metal is a prevalent investment option in India. There are different ways to buy gold – physical and digital. In addition to some other investment options, you can consider investing in gold for the child’s future. The best way is to buy a gold bar or coin and save any cost of making it.
Government/Post office savings schemes
Savings in the Public Provident Fund (PPF) is a popular investment option. One of the oldest forms of savings, the post office savings schemes are famous for their wide presence and accessibility. Moreover, these schemes are backed by the government and hence absolutely safe. Other savings options include Sukanya Samriddhi Account, National Savings Certificate, Kisan Vikas Patra, etc.
PPF is a time tested investment vehicle and has existed for many decades now. The principal amount invested is available for deduction from gross income under section 80C of the Income Tax Act. Moreover, the interest on the PPF principal is tax-free, making it a tax-friendly investment. The maximum investment possible in a PPF account is Rs1.5 annually. Since the tenure of a PPF account is 15 years, investors gain significantly through compounding. Parents have an option to open a PPF account in the child’s name, while the parents can continue to contribute. When the child becomes a major, s/he can choose to continue the account and extend the validity indefinitely in the block of 5 years.
Amongst all, Sukanya Samriddhi Yojana (SSY) is a hugely popular savings scheme. SSY aims to address the financial needs of a girl child, such as education and marriage expenses. Therefore, the SSY account can only be in the name of any girl beneficiary below ten years of age. Withdrawals under this scheme can happen when the girl turns 18 but with restrictions. The SSY account remains active for 21 years from its date of opening.
To save in a bank account is another most conventional option. One can quickly start a recurring bank deposit or a fixed bank deposit. With the reducing interest rates, these bank deposits have lost their shine. However, this is where a large chunk of public savings exists, and RDs or FDs are still considered the safest option by many.
Investing in stocks is risky, but, is still an option. You can expect higher returns if you invested wisely. Therefore, equity investments can bring you the best returns and help you create the most considerable corpus.
ETFs is as much an option as an equity investment. In other words, the risk and return profile remain considerably comparable, and investors can consider either or both.
We recommend you to invest only in A-listed equities only. The objective is to keep the money safe (first) and grow (second) over a significantly extended time. In other words, one should only take a safe bet here.
An old school of thought suggests investing in real estate, primarily land, to meet future demands. However, from a financial planning lens, investing in real estate (house or land) must be a part of an overall strategy. Real estate is less liquid, and challenges concerning title, unauthorized access etc., prevail and in some locations can be rampant.
In conclusion, there are many long-term investment options available to save money for your child. However, you should properly research the options and choose the best suitable one based on your financial objective and risk appetite. Keep these three pieces of advice in mind:
First, start early.
Second, continue to invest and never stop in between due to change in market circumstances.
And finally, do not hesitate to consult your financial advisor for any guidance.
Happy investing for your child!
About the author
The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.
The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take any responsibility for any error that exists.
Any views, opinions, and thoughts mentioned in the article belong solely to the author and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.
Under any circumstances, the author shall not be liable for any views or analysis expressed in this note. Further, the opinions expressed are not binding on any authority or Court. We advise readers to consult their financial advisor for assistance in their specific case.