Mother’s Day Special: Investments For Your Child

By Kavya Balaji | May 13, 2019

Mothers can’t stop giving the best of everything to their children. However, financial planning is required if they want to continue doing it. Here’s help.

Mother's Day Special Investments For Your Child

Every mother wants the best for her kids. The best clothes, toys, books. Education is obviously on top of the list. And when it comes to investments, Mutual Funds seem to be the preferred choice for today’s mother. Take Reema’s case for example. Reema, 36, is an Information Technology professional in Bangalore. She started investing in the stock markets way back in 2008 when her daughter was about a year old. Then came Mutual Funds. She loved the Systematic Investment Plan (SIP) and started investing in Mutual Funds. She found it to be a very convenient way of investing and has made profits of over 50% by sticking to her investments. That is why equity investments are the best if you are investing for your kids. Here’s how you can invest for your kid.

Additional Reading: 6 Things To Consider Before Opening A Kids Savings Bank Account

What should you do?

When you are saving for your kids, you need to ensure that you invest continuously. As you might know, long term investments, especially in the case of equity take time to show returns. Rather than looking at returns every day or every month, you should ensure that the average year-on-year returns from your investments are enough to achieve the target amount. This means that if the markets are on a roller coaster for a year or two, you must ensure that the average growth of your portfolio has slowed but not plummeted.

Also, understand the investment thoroughly before you invest. Some investments are riskier than others. Take the help of a financial planner if you think you don’t have enough knowledge or if you don’t understand the risks involved.

If, as a parent, you take the extra initiative to understand the nature of the investment, it can help you minimise the risks involved. This will also help you gain better returns from your investments.  For example, if you can grasp the volatile nature of equity MFs, you will not make the mistake of exiting investments prematurely which pushes you to lose the opportunity to grow your corpus.

Additional Reading: 5 Important Personal Finance Lessons To Teach Your Kids

Which investments should you look at?

As soon as your kid is born or when they turn one, you must start setting aside funds for their higher education and marriage. It is good to invest in a mix of Fixed Deposits, post office deposits and equity investments. However, it is best to invest a large portion of your money in equities as you will need the money only when your child goes to college.

How to start?

Equities have been known to beat inflation in the long run. Since stocks may not suit everyone’s risk appetite, it is prudent to start investing initially in Mutual Funds. You can first buy about 2-3 large cap diversified equity funds that invest in big names and the best firms. As the years progress and you gain confidence with Mutual Funds, you can look at other funds to enhance returns from your portfolio.

When you invest in Mutual Funds, always choose reputed fund houses because the fund house is good enough to survive those 15-20 years. You don’t want to get stuck with a fund house that will be taken over or acquired by another, right? So, choose a good fund house that will last your investment period. So which are the good ones? These are fund houses with a strong promoter backing and a decent performance track record to their credit.

Which funds to consider?

Now that you have chosen the fund houses. Choose the funds that you want to invest in.  Understand how they work and what has been their performance. Like we said, start with large-cap funds that invest in blue-chip stocks. You can choose mid-cap funds that invest in smaller companies after you are comfortable with your Mutual Fund investments.  You could even add more funds like tax-saver funds, balanced funds, debt funds and gold Exchange Traded Funds (ETF). However, don’t add funds to your portfolio unless they match your risk appetite. As a parent, you need to understand whether the investment will suit you. Assess your risk as well as return expectations before you add more funds. These will ensure that you stick to the investment until you meet your goals.

Additional Reading: Investment Tips For Dual-Income Couples With Two Kids

You could even consider investing in close-ended funds. These are funds that have a fixed maturity period and tend to be less volatile as opposed to open-ended funds where frequent entry and exits from the fund can affect the fund’s performance. Given the long term nature of the goals such as your kid’s education, it is not necessary that your Mutual Fund investments need to be liquid. In case of your close-ended funds, you need to remain invested till maturity. However, you need to choose such funds carefully. The best way will be to review the fund manager’s performance. You also need to check the fund mandate and how diversified the fund will be.

High-risk investor?

If you are a high-risk investor, you can look at sector-oriented funds that invest in a particular sector. But note that such funds perform well only for a certain period of time. So, when the fund has run up and you have made good profits, you need to exit the fund and invest the proceeds in another instrument. For this, you need to keep track of the sector, the markets as well as the fund performance on a regular basis. These funds are recommended only for savvy investors.

Low-risk investor?

If you are an investor at the other end of the spectrum and don’t want to take too many risks, you could invest in index funds. Index funds are funds that replicate a market index. They will give the same returns as the index they track. It is like investing in the broad market. In the case of index funds, the size of the fund’s corpus will determine how well the fund is able to track the market index that it is replicating.  So, it is important to choose funds with a big corpus.

Lumpsum or SIP?

Even though lump sum investments in Mutual Funds will also give good returns, SIPs are the best way to invest. The staggered nature of investing ensures that the stock market volatilities have little impact on the average cost of purchasing the funds. This is true only if you invest in SIPs for the long term.  Several investors today are following this method for investing for their kids.

Additional Reading: Best Equity Mutual Funds To Buy In 2019

Take the case of Sana. She has a three-year-old daughter for whom she has started investing through SIPs. According to her, SIPs are very convenient. She says that by using SIPs she needn’t track her investments on a daily basis. Sana feels that she will also have the added advantage of enjoying market returns and says one shouldn’t stop investing in SIPs as that will beat the whole purpose of investing. So, don’t stop your SIPs or exit your investments when the markets go down. When markets go down, sit down and review the funds in your portfolio to check if they are doing well and whether they will help you meet your goal. Don’t chuck any fund unless it has been underperforming for more than a year. Find all this a hassle? This is the reason why you should have a mix of both debt funds and equity funds in your portfolio.

Debt funds?

Whatever be your risk appetite, it is important that you invest at least 10%-20% of your Mutual Fund portfolio in debt funds. This will be for two purposes – one, it will enhance the liquidity of your portfolio and second, and the most important one is that it will provide stability to your portfolio. When your investments grow regularly, your portfolio risk is reduced. Debt Mutual Funds provide this for your portfolio. If you are willing to take slightly more risk, you can look at long-term debt funds. Debt funds can also provide regular income which you can use to fund your kid’s expenses such as extra curriculum classes.

Tracking performance?

Even though it is good to invest in different kinds of funds, ensure that you invest in not more than 6 funds. This way you can easily keep track of each fund and their performance. Also, any changes in the fund’s management or mandate can be easily noted down. Having a lesser number of funds will also mean lesser work for you when you need to review and rebalance your portfolio. You need to review equity investments once a year. For debt fund investments, half-yearly reviews might be needed. Note that a review might be necessary when a fund manager exits a fund or if the fund has given high returns due to bull runs or has given dismal returns despite markets performing decently.

Your review of a fund could result in either of these actions – one is buying more of the same fund or two, selling the fund. But before you decide to take action number 2, check whether the fund has any of these issues– consistent underperformance (for 2 years or more), change in the management of the fund, fund manager exit, changes in fund mandate or changes in the asset allocation of the fund.

Additional Reading: How to Fuel Your Child’s Aspirations to Study Abroad

Asset allocation changed?

You might also need to take these actions in case your own asset allocation changes. This might happen when the funds have given returns that are more than your expectations or when funds have not given returns as per your expectations. Typically, underperformance or outperformance of an asset class such as equity will change your asset allocation. This will, in turn, result in the need for you to rebalance your portfolio.

Asset allocation is of many types but the two most common types are strategic and tactical. Strategic allocation is a long-term plan and requires less frequent changes to your portfolio while tactical allocation has a short-term outlook. You can consider tactical allocation when the near-term outlook of one asset class is weak while you find another asset class has chances of giving you great returns. For example, this year you could have reduced your exposure to equities while increasing exposure to gold through ETFs because gold has outperformed equities. This can be taken up by savvy investors who want to enhance their returns. But you must go back to your strategic allocation once you have made the profits from the new asset class. A disciplined, unemotional approach is the key to a successfully rebalancing of your portfolio. And don’t forget that portfolio reviews and rebalancing are necessary when you hit milestones such as marriage. The same is true when you receive inheritances.

Investing windfalls?

Windfalls could be invested in instruments that don’t have high risks. Would you want to risk losing your windfall? No, right? Then, go for options such as balanced funds which will give you good returns but will ensure that your capital is not at total risk. You could consider investing in debt funds initially and then, use the Systematic Transfer Plan (STP) to put money in equity funds. STP is where you put a lump sum in a debt fund and transfer it to equity funds like an SIP or whenever the markets fall. This method is best suited for the self-employed individuals who do not receive a regular cash flow to be able to invest through the SIP route.

Note…

Mutual Funds that are less risky when compared to stocks can be considered. However, you will face a number of difficulties if you stop your investments or withdraw from your investments. Frequent entry and exits from your investments will not only increase the cost of managing your portfolio, but it will also increase the risks of not meeting the financial goals that you planned for. So, wait patiently.

Additional Reading: Are You Financially Responsible Towards Your Children?

Mistakes to avoid

  • Following the herd – Don’t buy a fund just because your colleague is raving about it
  • Selling when chips are down – Selling at every market downturn will obstruct the power of compounding growth for your investments
  • Holding consistent underperformers – Review funds regularly and replace the lethargic ones
  • Buying on euphoria – Avoid buying whenever the market hits a high. This will only increase your cost of acquisition
  • The missing link – Always link the investments to your goals

A little prudence from your side will ensure that you have a good corpus for a world-class education for your little darling. And whenever you want to withdraw funds, think of your angel’s face. We are sure you will forget the thought. Patience pays –both in case of bringing up your child and your investments. Want more help? It’s right here!

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Investments
Kavya Balaji

About Kavya Balaji

A personal finance professional with over 10 years of experience in financial research. She believes financial literacy is important and is passionate about sharing her knowledge on the subject.

Leave a Reply

Your email address will not be published. Required fields are marked *