Planning Your Childs Future is No Childs Play

Having a child may feel like the greatest joy of your life. Soon the enormity of the responsibility dawns upon you. You have to be responsible for present as well as the future of your child. Like every parent you must have also dreamt of providing your child with the best of everything; education and a good life with all comforts. You know it rather well those big dreams tend to get expensive. While your intentions are in the right path, you doubt your current financial standing will be able to sustain the regular expense, the added expense of a child’s regular needs and the big plans you have made for his or her education and marriage. It must be becoming clear that for your plans to materialize along with a certain financial standing you need planning. The investment planning needs to be carried in such a fashion that you get the right amount of return on the investment you have made in order to achieve the goal.

The figures of primary, secondary and higher education may look like large sums. There is no denying that the cost of education has been consistently rising and the same will continue even in future. You have to be prepared for the cost that ensures your child gets the best education you can afford. So how do you go about the investments? The integral part is to start investments immediately. Here are some of the factors you must consider:

The Estimated Expenses: Inflation and More

Source: Advisorkhoj Future Value Calculator

(Inflation has been assumed to be 6%. Costs may vary depending on the institution, course and inflationary factor)

Source: https://www.advisorkhoj.com/tools-and-calculators/future-value-calculator

The chart and the graph above is an attempt to give you an estimate of the future cost of the education might be and the investments that needs to be carried out to afford such education. The future cost is calculated after factoring inflation at the rate of 6% but the actual cost may vary depending on the course, institution or place or country of study. For example, foreign education will cost much more and Government institutions are a little lighter on the pocket. Inflation is that one factor that has the capability to erode all forms of savings if not channelized properly. Investments should be done with the aim of meeting the future value of the education cost while generating inflation adjusted returns. Equity Mutual Funds generate inflation adjusted returns while most of the traditional forms of investments like fixed deposits, post office saving schemes and recurring deposits etc. do not. Make sure what you have earned do not get lost because of inflationary factors.

The amounts above are lump sums and may be easily available with us. It is obvious that to be able to afford the future cost, you will have to start planning early. In situations where you have to reach a substantial amount in the future Systematic Investment Planning of Mutual Funds is the best way to go. You can invest as small as र 500 per month and keep investing regularly. The amount may sound small and insignificant but small amounts like these become large due to compounding over a long period of time. How much would you need to invest systematically so that your child can get the best education? Lets us look at the chart below –

Source: https://www.advisorkhoj.com/tools-and-calculators/systematic-investment-plan-calculator

The above chart clearly shows how powerful SIP investment can be in meeting your child’s future goals. As you can see an amount of र 10,000, if invested systematically over 10 – 15 years, is good enough to provide your child with the best education

Take the Equity Path

Equity as an asset class has been proved to be the best path to generate wealth in the long term. Hence, to maximize returns equity investments are mandatory. If the time period of investment is five year or less, for example - your child is going away to college in five years or less you may take a balanced route and make your investments in a mix of Equity and Debt Funds or go for Equity Oriented Balanced Funds. This will maintain a balance in your investments and protect it from short term fluctuations.

In case your investment horizon is 10 years or more then for higher education or marriage you may opt for pure Equity Diversified Funds. Long term investment period creates substantial corpus by way of compounding and reduces volatility. Hence, either ways make Equity or equity oriented investments your priority.

Adequate Insurance Cover

Along with regular investments you will also need adequate insurance. Before your child was born you may have had insurance enough to cover you and your spouse. With the new addition in your family, you need to increase the term plan. It should be adequate enough to cover both your spouse and your child. Ideally, your term plan should be 10 to 12 times of your annual income. Adequate insurance cover ensures that your family stays protected even after your untimely demise. In case of your unfortunate untimely demise the insurance amount should be enough to cover your child’s higher education and marriage.

Do Not Ignore Your Other Goals

Fortunately, planning for your child’s education is one such goal for which you can opt for a loan. The loan, usually taken for higher education could also be repaid by the direct beneficiary of the loan and you may not have to take the burden of repayment. Even if you have to do, you will still have a steady flow of income to pay off the loan. However, in order to save the most for your child do not ignore your other financial goals such as retirement. While the goals related to your child are important there are loans to help you fulfil those. However, with a goal like retirement, you need to have the corpus because you cannot borrow for such a goal. In case you fall short for the goal of education, do not dip in to your other savings or investments.

Child Plans Vs Equity or Equity Oriented Investments

There are a lot of Insurance or other plans which claim to take care of all your child’s needs. The plans may include an equity investment and insurance component. They usually have the word “Child” in the plan to indicate the member for whom this investment must be done. Do not get carried away by the names of the funds. Assess the viability of your fund by comparing that to your situation. If by investing in Equities and Insurance separately puts you at a better place at lesser investment cost that is the way to go. If you invest regularly in equity, debt or balanced balanced funds then these investments are enough to cover the future costs and in that case you need not take any extra investment pressure. However, if you or your financial adviser believes that any of these suggested schemes has to be integral to your child’s future planning due to some of the features which your existing scheme does not offer, then you could give it a thought. However, based on our experience and the past track records, investment in diversified equity funds is the best way to achieve all your future financial goals.

Conclusion

Let us twist the saying “All’s well that ends well”. To suit the investment temperament it may be said “all’s well that is started well”. In case of investment a truer statement has not been said. If you start your investments as soon as your child is born, then it grows like your child and can be fully utilised when your child needs it the most. Often times the fatal thinking that your child is too young and investments can start a little later hampers the possible progress of investments. You could be outing your child’s future at stake. To avoid such an unfortunate scenario you may start small but start at the earliest while keeping the following key points in mind –

• Before preparing your future plan related to your childs education or marriage keep inflation in mind while calculating the future cost of education or marriage


• Start investing early and regularly


• Investing regularly through Systematic Investment plan in Diversified Equity Funds is the best way to achieve goals. Check this Calculator to know the returns of Diversified Equity Funds


• The decision to invest in equity, debt and balanced funds should be according to your risk taking ability, the time horizon, your existing investments and your current income levels


• Never use other funds, allocated to achieve other financial goals, with that of your child’s future goals like education or marriage


• Never get carried away by name of schemes having the word ‘child’ in it.


• Always maintain adequate life insurance cover in case of any unfortunate event which might affect the future plans of your child


• Do not mix insurance with investment


• It is always advisable to take help of a financial advisor to plan, achieve and monitor your child’s and your future financial goals.