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Are you doing the right investments for your children?

When we talk to you, our investors, there is one thing we know for sure. You are all earnest in your attempt to save for your kid’s future. You dream big and want to do your best to help them achieve it.

But are you focusing on the right things when it comes to saving for their future?

Let’s look at some common investment habits and see if we need to change them.

RDs are never going to catch up
I will be surprised if I know any young parent, who does not have a recurring deposit in a bank for their kid. I genuinely think it is a great first step to save for your children. Unfortunately, it is simply insufficient and you (or your child) are not going to go a long way with the sum you accumulate.

A-Rs 5000 per month RD at an average of 9% interest rate over 10 years will fetch you Rs 9.7 lakh. Post tax at 30% (which is where you will be, even if you are in the 10% tax bracket now) you will get Rs 8.6 lakh in hand. That sum is probably not going to be enough for even any under graduate course 10 years hence!

Silhouette, group of happy children playing on meadow, sunset, s

Fancy insurance policies; if you don’t understand, don’t invest
As a next step, most of you look up to child plans from insurance companies to secure your child’s future.

Yes, the biggest advantage of a child plan is that in the event of the parent’s death before the term ends, the child not only gets the sum assured but also gets the benefit of the insurance company continuing to invest on behalf of the policy holder.

But what if the policy per se is a bad one? Its charges could be high or it could be making very poor investments with your money and earning much lower than the market. Very likely you will not track the performance of your policy, the way you will track a mutual fund, where information is available every single day.

While child plans have their convenience factor, you could get a much, much higher term cover for your life and with the premium saved (on a child plan), run very decent SIPs in mutual funds and change the funds when performance suffers. That way, your investments remain optimal.

With some basic education to your spouse on where to invest the money from any term cover (if one partner is no more) lump sum received, you should comfortably see through your child’s future. To my mind this is a better option.

After all, what is the point in knowing that 10-15 years down the line, you will get ‘something’, if you have no clue if that ‘something’ will suffice or not and you can’t do much course correction because you don’t understand how it performs?

No houses please
If there is one thing I am clear about it is this: investing in a property for your childis not a great investment idea.

It is even worse when you are in your 50s and buy a property hoping that your son/daughter will soon take over and pay the EMI.I am not suggesting that they will not pay. Just that we should ensure that we don’t put them into an EMI trap; when they have little savings or when their education loan is yet unpaid.

Even if you bought one early on, is your kid going to live there, given how mobile jobs are today or the increasing number of NRIs that we are seeing?

Or are you going toadd to her hassle in having to maintain a property from abroad or struggling to sell it and get the proceeds, sitting in a foreign land?

Use simple, sophisticated, liquid financial instruments like shares or mutual funds if you ever wish to gift your child. They will thank you.

Whatever be the mode of investment, be it bonds, deposits or mutual funds, tell me why you would need to have interest or dividend payouts, if you are securing your child’s future? You are simply interrupting the process of compounding by doing so. And it is highly unlikely that you will reinvest every payout of interest or dividend you receive.

Let’s get this straight. You don’t need income flow in your earning years; you are building wealth for your child. You ought to choose options/products that use compounding in the best possible way.

Step up every year
Whether you started your investment in smart products such as mutual funds or conservative ones like RD, you still need to do smarter things. You need to step up investments. Many of you will likely not have the savings that your advisor told you you’d need to achieve your child’s education corpus.

You start off hoping you will catch up soon. That’s never going to happen unless you automate that too. This is why step-up SIPs (available with your FundsIndia account) make great sense!

Use our Calculator to see what difference it makes. A-Rs 5000 a month SIP for 10 years would fetch you about Rs 11.6 lakh after 10 years, if it earned 12% annually.

With a step up of Rs 1000 (that is Rs 6000 the next year, Rs 7000 the year after and so on) annually, you would have about Rs 19.1 lakh with the same return. And none of you can give an excuse that saving Rs 1000 more every year is difficult!

Truly securing their future
While I will leave the above points for you to mull over, there is one practice above all of these that I feel will truly secure your child’s financial future and that is teaching them the value of money early on. Allowing them to handle investments in a small way would help them long into their future. I can say I was a beneficiary of such an act by my father.

Happy Children’s Day! Happy Investing!

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5 Responses to Are you doing the right investments for your children?

  1. Satish November 14, 2014 at 3:44 pm #

    Hi
    Nice article on securing childrens future. I have some questions
    Am investing in SIP through growth option particulary in large caps funds like FT India Bluechip and DSPBR Top 100 from past 3 yrs for my young kids who are 1 yr and 6 yrs for their education and marriage. The purpose I choosed the large caps are they are less volatile compared to other category of funds since the goals are non-negotiable.

    In my opinion even if we do sip’s in average equity oriented large caps mf’s can create a large corpus for childrens secure future in the long term than other traditional prodcuts like RD, NSC etc. Am I right in this?

    One more question do we need to keep on churning the funds frequently due to ratings and rankings every now and then? Please comment

    • Vidya Bala November 14, 2014 at 4:41 pm #

      Hello Satish,

      Good questions really.

      1. Without any doubt, even a conservative large-cap fund such as FT India Bluechip (17% IRR returns through SIP) or another large-cap fund such as Birla Sun Life Front Line Equity (19% IRR in SIP) beats our traditional NSC or RD by a mile. A 10-year RD would have given single digit post tax returns and NSC’s yield would be slightly better than the RD.

      2. No, you should avoid churning frequently and incurring costs. Many of the ratings are short-termist (like FT Bluechip had a rating a while ago in one of the rating channels) and temporary set backs in funds should not be a trigger for you to exit. Only if the performance really slackens compared with peers and benchmark should you resort to it. Get your advisor to review your portfolio annually and ensure your funds are investment worthy and do not lag by a big margin.
      Vidya

  2. priyamani April 27, 2015 at 2:20 am #

    Hi
    I am new to mutual funds. I want to invest through sip for my kids education and marriage (girl aged 7 and boy aged 4). I dont know where and how to invest in mutual fund exactly for long term with good returns. please help me.

    • Vidya Bala May 4, 2015 at 12:21 pm #

      Hello, If you have an activated FundsIndia account, you could invest using our smart solutions: http://www.fundsindia.com/smartsolutions

      Else, on activation, you could talk to our advisors and they will help build a suitable portfolio for you, based on your time frame and goal.
      thanks, Vidya

  3. Manas Kar November 24, 2015 at 10:13 am #

    Great Advice!

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