Please wait...

Head Start

‘Hi, I came across this interesting article on the Franklin Templeton website. Check it out!’
Saving for your Child

Securing your child’s future is important to you and education and marriage are part of this prized goal. However, many of us leave investing for our children to the last minute, while others tend to rely on a half-baked plan. The earlier you plan for it, the greater will the benefits be. Here is taking a look at how to meet these future needs.

ESTIMATING

To achieve specific goals set for your child, calculate the potential future value of the corpus required after adjusting for inflation. This will save you the right amount of money. The goal being long-term, go in for equities - these deliver higher inflation adjusted returns than any other asset type. For example, a wedding that costs `25 lakh today, would cost nearly `70 lakh 21 years from now at an assumed inflation of 5 per cent. Now, assuming that equities generate a return of 12 per cent for the next 21 years, estimate the monthly savings for the purpose. Similarly, you can calculate the monthly savings you need to make for your child’s higher education.

THE RIGHT MIX

When it comes to planning for your child, you may want to stick to largecap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. They give rea-sonable gains when equity markets rise and are also comparatively less volatile when equity markets fall. A little exposure to mid-cap funds, which are known to give sudden spurts in their performance along with high-risk funds such as thematic funds can be considered to get the kicker in returns. You may, however, have to increase your portfolio review frequency. The idea is to take the equity advantage and yet control the risks you take. Choose well-performing equity schemes with an established track record. A more passive way is to choose ETFs and index funds, or a mix of them. Simultaneously, open a Public Provident Fund account in your child’s name. Make him continue funding it when he begins to earn.

THE SELECTION

If you are in for the long haul, assess the targeted MF schemes on the following criteria. Look at the funds’ long term performance. Consistency pays in the long run and matters most when final corpus is considered. The performance of schemes within the same fund family may vary as they are run by different managers and have different portfolios. Hence, take a close look at the targeted scheme’s performance, its portfolio and the investment strategy that the scheme follows. Do not necessarily choose child-specific MF schemes.

THE APPROACH

After estimating the monthly savings required and identifying various MF schemes, the right approach is what matters. Systematic investment plans (SIP) involve investing a certain fixed amount of money at regular intervals rather than investing a large lump sum. This form of investing suits those who cannot invest in lump sum, but can invest regularly. This way you don’t capture the highs and lows of the market. Rather, the cost of your investment is averaged over a period of time. The essence of SIPs is that when the markets fall, investors automatically acquire more units. Likewise, they acquire fewer units when the market rises. Therefore, the average cost per unit drops down over a period of time. It helps forced savings and doesn’t make you scramble for funds at the last minute. Further, part of the money a child gets in, say, birthday gifts, could also be invested in these MFs.

THE REBALANCING

You may choose equities if your child’s wedding is not on the cards soon. Go for short-term debt mutual fund assets to meet immediate goals. Monitor the performance of your portfolio and keep rebalancing it regularly. In part II of this series, we will look at ways to derisk investments as goals approach.

IN BRIEF

Work out a roadmap for family finances with your spouce. Also, always let your partner know where you stand in terms of finance rather than giving him or her a nasty surprise later.

Next To Come: Derisking Kids' Funds