When it comes to planning for their child’s future, there are various issues that parents face. Most don’t know where to start, what to exactly save for, how much to invest and where to put their money. Earlier parents did not face this problem. In the recent few decades, with the skyrocketing education cost, parents now have to think through their finances for their children.
Like most couples planning for their child’s education, then graduation and post-graduation, you might also be saving a lot today for the long run, but will that be enough then? Also, have you factored in inflation? These are the issues that most people face.
If you are also planning for your child’s future, here is what to do:
How should you go about it?
Before choosing investment instruments for your children, the first step is to identify what are you investing for. Setting goals will help you determine which financial instrument you should choose. Before you start investing for your child, you should also consider some basic principles. The exercise should start with an assessment of the fund required to fulfill future goals for the child. By working backward, a parent would broadly know how much is required to be saved every month or year. For instance, one of the most important goals a parent would have for their child – their higher education. Ashok Kumar ER, CEO, and Co-Founder of Scripbox says, "Depending on your child's current age, the present cost of college and what it would be when your child is ready to go to college taking education inflation into account will help you determine the time horizon you have, how much you need, and therefore the instrument you need to choose."
Where should you invest?
For most parents, the planning usually starts immediately after the birth of the child or a few years after schooling begins. Ideally, it should start as early as possible as this enables the parent to maximize their investments through the power of compounding.
There are various options that can be considered for financial planning – the regular savings bank account, fixed deposits, government and post office schemes, market-linked instruments, life insurance products, etc. Keep in mind these are long term investments which can range from anywhere between 10 to 20 years, hence, choosing an appropriate instrument is important as per your risk appetite.
As of now a medical degree currently costs between Rs. 7 lakhs to Rs. 20 lakhs a year, will cost much more in the future. Srinivasan Parthasarathy, Chief, and Appointed Actuary, HDFC Life, says, "The cost of education keeps increasing with time; hence, it is necessary to choose an instrument that enables the investor to beat inflation. At the same time, what cannot be neglected is the need for securing the investment, to ensure that it continues even in their absence."
All parents want to give their children the best in life, meanwhile, parents must ensure that uncertainties in life do not bring the lives of their loved ones to a standstill when they are not there. Pure life insurance plans compensate for the lost future income of the breadwinners of the family. Hence, this financial solution should be included in the portfolio of every parent.
Experts suggest one should not undermine the importance of futureproofing the investment against the uncertainties of life. A life insurance policy, in that case, proves to be useful as it acts as an income replacement tool for the individual. Hence, the child's goals are not compromised in case of unfortunate death, disability or illness of the parents. An unfortunate event like death or disability of the bread-earner of the family can cause serious financial strain to the family. In a situation like this, protection plans and riders like the waiver of premium attached to insurance plans act as the savior. Additionally, most child plans come with a built-in waiver of premium rider which ensures that in case of death of the policyholder, future premiums are paid by the company. This feature ensures that the investor’s savings towards his/her identified goal continue uninterruptedly.
Samit Upadhyay, CFO, and Head Product, Tata AIA Life Insurance says, "An investor may choose an investment avenue based on their risk appetite and the duration of the investment. For instance, unless the investor has a very low-risk appetite, typically investments in equities through unit-linked insurance plans or mutual funds are preferred." He further adds, "More than the instrument used, parents must prioritize starting early. Also, he/she must keep investing regularly and should not dip into the corpus unless it is absolutely necessary."
Different financial instruments play different roles in your portfolio. It is advisable to choose them on the basis of your needs and goals. Fixed deposits can serve your shorter-term needs, if you need to save up for your child's primary education, extra-curricular activity, etc. Sanjay Kao, Chief Business Officer, Ujjivan Small Finance Bank, says, "Primarily when planning for their child's education, investors can look at investments like recurring deposits and fixed deposits. In such investments, the principal amount is guaranteed." Additionally, debt mutual funds are an alternative to fixed deposits, keeping liquidity and taxation in mind.
However, certain situations in life need the occasional heavy outflows and hence, need proper financial planning to be met. Merely depending on low return/fixed return investment income may not be sufficient for such purposes. Mohit Bhatia, Head Sales, and Marketing, Canara Robeco Asset Management, says, "While planning for one's child financially, parents should consider various investment avenues. For emergencies, a small portion of funds to be allocated and kept handy (preferably in a liquid fund or a bank deposit), and for long term wealth generation, parents can look to match their liabilities/ funding requirement by investing in equity-related instruments which are long term in nature."
Investments through mutual funds play a vital role in the financial planning of a child's future. Different types of mutual fund schemes can help parents in their overall agenda of taking care of the financial needs of the child. Bhatia, from Canara Robeco Asset Management, says, "Parents can use a mix of short term and long-term funds to meet such a goal, for example, short-duration debt fund could be used for growing up needs like healthcare, while an equity fund could be ideally suited to arrange for their child's post-graduation fees, required after 15 years from now." A combination of systematic Investment Plan (SIP) and Lump sum (One Time Investment) could be used to achieve this; additionally, parents can also use other facilities like SIP Top Up and STP to reach their goal.