The arrival of a kid brings in a lot of happiness into the family, especially to the parents, at the same time it also brings along many responsibilities for the couple. All of us are responsible; but uncertainty could collapse the financial health of the family at any time. It is sensible to save money 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 any other saving instruments that offer very less returns; whereas, an investment with good returns will keep us financially secure. By investing our savings, we can ensure the safety of our money and earn good returns. This will leave our children financially secure. The following tips should help one to make an appropriate investment plan for his child’s future.
Know your plans
It is always advisable to start saving as early as possible, but we need to plan before we start our investments. Planning is the first step to be taken before starting our investments because it is for the future of the child. We should understand 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 investment decisions, all our investments should reflect our needs. Although individual goals will vary from person to person, it can be commonly categorized as short-term goal or long-term goal.
For example, long-term goals for your child could be the money required for undergoing a professional course abroad, capital required for a business venture (if he/she wants to be an entrepreneur), money required for his/her wedding etc. Investment in the stock markets could be a best choice for your child’s long-term investments but the level of risk is higher and so are the returns. Most of the studies have also suggested that investment in equities offer higher returns. Long-term goals can be achieved by putting your money into “investments” – meaning instruments, which carry the risk of eroding the original capital yet having the positive risk of increasing in value to beat the effect of inflation. At the same time, endowment type plans, Public Provident type low return plans etc. should be a least priority item on your investment list, if you need to fight inflation on your returns.
While considering real estate type investments for long-term goals, plan them in such a way that you can exit the investment at least 2 years before the actual need, this will you will have the time to overcome any negative growth. For example if you want money 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.
The short-term goals could be schooling in an international school, other extracurricular courses, training and participation in live contests within the country or abroad etc. Invest in funds with more liquidity for the short term goals. The best bet for short-term goals are “savings” instruments, meaning those which will guarantee return of the original capital even if there is no growth. Saving bank deposits, short term FDs etc come under this category.
Choose the right Investment plans
It is not just enough to choose to invest, but to choose the right investment plan. Consider your income and the amount you can spare for investment, analyze the time in hand, the level of risk, liquidity, returns, the capital appreciation etc. before making your investment decisions. The returns that are expected should be sufficient to meet your needs at that time, so be careful while making investment decisions. Try to avoid investments that carry higher risk and investments that offer returns that might be fluctuating; by choosing such plans you are only going to carry more amount of risk.
Covering Risk
An insurance policy is probably the most important instrument in which you need to put your money to keep your child financially secure. Make sure that you buy a Term-Plan (avoid the fancy money back/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, compounding 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 will help you save money 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 depends 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 ETFs as they invest in physical gold and can be sold or bought on the stock exchanges. This purely helps you to safeguard your gold and offers more liquidity.
Always include inflation as an important factor in your investments and intend for higher returns with low risk. Make your child’s future financially secure by wise investment planning. At every stage of his/her life, make sure that the instruments you have chosen can be converted easily and efficiently into liquid cash.