Most investors have the mind-set that investing in Mutual Funds and other equities related sources are quite risky and opt for the traditional approach of saving – investments in Fixed Deposits, Recurring Deposits etc. These funds, upon maturity do not provide adequate returns when compared to equities. Therefore, you might end up taking a debt of an educational or a personal loan or any other kind of loan just to bridge the gap between your child’s dream and your finances. In such a situation the reason for investing becomes invalid. That is why most financial advisors advice that, if you have a child, start investing in his/her name, as soon as they are born, in Mutual Funds through the SIP route. It is not ALWAYS risky. But with your ability to choose wisely, your money can grow multiple times given that you hone skills like perseverance, discipline and patience.
There are multiple factors you need to bear in mind as to what are the financial requirements you need to fulfill for your child. Responsibilities like higher education, setting up a business, marriage or even leisure like a foreign vacation etc., should be penned down. According to that, you need to plan out as to how much of your income should go into saving for your child’s requirements and what are the type of assets you need to invest in. There are various types of funds that are available for you to choose from depending on your requirement and risk appetite. Funds under various categories like large cap, large- mid cap, small cap, and small – mid cap, multi cap fund, sectoral funds, and debt funds are available. However, it depends on your fund manager’s ability as to how well he is able to swiftly move across market capitalization in order to gain from investments and help in increasing your returns.
Apart from this, you as a prudent investor should know, how to choose the right fund. Opt for those funds that have performed consistently better during the bullish and the bearish market phases. It shows the sustainability of the fund over a period of time. Do not get yourselves into investments that have newly joined the Mutual Fund Industry, rather go for those funds that have enjoyed quite sometime in the market. Another important aspect to bear in mind is to factor in inflation. Most often, an investor gets lured by the percentage of interest that they gain on their investments, but none of that is going to matter if the rate of interest at the time of maturity is lower than that of the inflation rate. It will lead to negative returns and therefore, will reduce the value of your investments.
A 10-12 year time frame for investing for your child’s future is appropriate. In order to multiply your investments look towards investing in large cap and large-mid cap funds. Opt for funds that have a proven track record and invest through the SIP route. Religiously, set aside a portion of your income towards achieving this goal and try not to deviate from this.
Once your fund nears its maturity date, as in if 2 years are left for the fund to mature, transfer it to a debt fund where it will be safe from market shocks in the eventuality of a market crash. The funds will not be lying idle and will also enjoy a certain amount of interest addition. Make sure to do this as it will safeguard your investment. Also, do realize that, once you have started investing, there might be certain phases where the market might face a slowdown or bump in to a crash. Do not be afraid, this irregularity will only last for a short period as the market has the tendency to correct in the long run.