The birth of a child brings a lot of happiness to the family, and especially to the parents. At the same time, it entails many responsibilities for the couple. Uncertainty could collapse the financial health of the family any moment. It is therefore prudent to save for the child’s future and keep them financially secure even during our absence.
The negative effects of inflation will hardly leave us with anything in the end if we choose to save money in bank deposits or other saving instruments that offer less returns. At the same time, an investm-ent with good returns ens-ures financially security. By investing our savings, we can ensure the safety of our money and good returns. This will leave our children financially secure. The following tips should help one to make a suitable investment plan for his/her child’s future.
Know your expenses
It is always advisable to start saving as early as possible, but we need to plan before we begin inves-tments. Planning, is the first step. We should unde-rstand how much money would be required for the child’s school education, higher studies, wedding etc. The other important factor we need to remember is the expected rate of inflation and its effect on the value of our returns.
Set up goals
We need to set up goals before we make our decisions. All our investments should reflect our needs. Although goals will vary from person to person, it can be commonly categorised as short-term goals or long-term goals.
For example, long-term goals for your child could be the money required for undergoing a professional course abroad, capital req-uired for a business venture, money required for the wedding, etc. Investing in stock markets could be the best long-term investment as the level of returns are higher, but so are the risks.
Most studies have also suggested that investment in equities offers higher returns. Long-term goals can be achieved by putting your money into instruments, which despite carrying the risk of eroding the original capital have the positive risk of increasing in such value so as to moderate the inflationary impact.
At the same time, endowment-type plans and public provident fund-type low-return plans should be a low priority item on your investment plan, if you need to fight inflation on your returns. If you are considering real estate investments, plan them in such a way that you can exit the inve-stment at least two years before the actual need.
This way will you will have the time to overcome any negative growth. For example, if you want mo-ney for your child’s marriage, sell off the piece of land when he/she is in final year of college and put the money in a low-risk instrument.
Short-term goals could be schooling in an international school, other extra-curricular courses within the country or abroad, and the like. Invest in funds with more liquidity for short-term goals. The best bet for short-term goals are those instruments which will guarantee return of the original capital even if there is no growth. Sav-ings bank deposits, short-term fixed deposits, etc come under this category.
Choose right plans
It is not enough to decide to invest, but you have to choose the right investment plan. Consider your income and the amount that you can spare for investment, analyse the time at hand, the level of risk, liquidity, returns, and capital appreciation before making your investment decisions. The returns that are expected should be sufficient to meet your needs, so be careful while making investment decisions.
Try to avoid investments that carry a high risk and investments that offer returns that might be fluctuating.
Covering risk
An insurance policy is probably the most important instrument in which you need to put your money on to keep your child financially secure. Make sure that you buy a term-plan (avoid the fancy money back or investment type insurance plans till you have a proper term plan cover). The term plan should give you a cover of a minimum of 10-12 times your annual income plus any liabilities that you carry.
Other avenues
You can open a savings account where the interest is compounded, as this gives you better returns.
Investments in mutual funds are also a better option as the investment is systematic and they cost you lesser than other instruments.
Choose a balanced, open-ended scheme, which will offer more liquidity, and a closed-ended scheme, which will help you save for your long-term goals.
While choosing to invest in mutual funds, remember to look at the asset allocation as more allocation in equity could increase your risk. Again, this depe-nds on whether the investment is for the short-term goal or the long term goal.
Investment in gold is also a good option because no Indian marriage is complete without gold. You can choose to invest in gold exchange traded funds (ETFs) as they invest in physical gold and can be sold or bought on the stock exchanges. This helps you to safeguard your gold and offers more liquidity. Always include inflation as an important factor in your investments and inte-nd for higher returns with low-risk.
INVESTMENTS
LONG TERM:
* Invest in systematic investment plans of mutual funds to fund your child’s higher studies or marriage.
* If you want to invest in mutual funds, invest in both open-ended fund for liquidity and close-ended fund for returns.
* Purchasing a house or a plot of land could also help in achieving your goals.
* Gold plays an important part in the Indian marriages. So invest in gold ETFs, which can be used for your child’s marriage.
SHORT TERM:
* Short term goals include your child’s schooling and extra circular activities.
* Park your funds in savings accounts or invest in liquid funds, which offers your safety with a minimal return.
(The writer is CEO of BankBazaar.com)