To build a portfolio of investments for your child’s future, you should start early. This way you will have the luxury to pick and choose your investments. However, this is not a simple task. You have to decide on whether you want safety and assurance when it comes to investing for your child’s future, or do you want high-return investments to get a sizeable corpus as, say, you want to send your child abroad for studies, or do you want a bit of both?
Usually, it’s a combination of both that works. But before listing out products, one has to put in place a workable strategy. Here are some suggestions by financial planners, which can act as a guide for you to start or to catch up if you have missed the early bus.
Keeping goals separate
Before you get down to planning for your kids, get the basics right. Buy a term life insurance plan and safeguard your kid’s future from any eventualities. Have a good medical policy for the family. Then you can start planning investments.
Usually, one has to plan for four phases: school education, college education, post-graduation, and marriage. B. Srinivasan, director, Shree Sidvin Financial Services and Investments Pvt. Ltd, suggests that an ideal way to plan for your kid’s schooling is to build a corpus that at any given point in time, has three years’ worth of fees.
Usually, basic education expenses are addressed from regular income flow, and it’s higher education that needs to be planned for more thoroughly.
Amount of money you need to allocate to this goal depends on which type of higher education you are looking for—whether it is a college in India or abroad, or professional degree.
“Many parents have ambitions to send their kids abroad. But they may not have the capacity to save up that much. We need to understand our earnings better and see how much we can save,” said Nisreen Mamaji, a certified financial planner, and founder, Moneyworks Financial Advisors.
But while saving for your children’s future, financial planners say that this should not compromise other key goals, mainly retirement. “I ask my clients to make retirement planning their primary objective. Children will be able to take loans for their education when they grow up and would have their work life to repay. But when you retire and you don’t have money to take care of yourself, it’ll be a problem,” said Sanjay Durgan, founder and director, AbunDanze Wealth Management LLP, a Delhi-based company that advises on mutual funds (MFs).
Yet there are some who may not have planned well, and dip into their retirement basket to fund their children’s education. “If you have used up funds earmarked for other purposes, you will have to refill that basket before that goal comes into play,” said Raghvendra Nath, managing director, Ladderup Wealth Management Ltd.
Go easy on the non-discretionary spends. “We don’t usually advise clients to adjust other goals for a child’s education. Rather one can adjust the house, luxury, or spending needs,” said Surya Bhatia, a Delhi-based certified financial planner. Since planning for your child’s education is an on-going exercise, amounts can be increased later if your income goes up.
Selecting assets
A thumb rule is that if the goal is long-term (7-10 years or more away), then use growth assets such as equity to address them. On the other hand, if you only have 2-3 years, then it’s better to opt for fixed income options.
“If you are saving for your child’s higher education, and if it is at least 10 years away, equities will work best. Moreover, you will continue to earn and your income growth can be a hedge for this goal. Thus, you can afford to take higher risk to maximise returns,” said Nath.
Equity MFs are the way to go if planning for your kid’s higher and post-graduate education. Put money in through systematic investment plans (SIPs).
D. Muthukrishnan, a Chennai-based MF distributor, however, suggests that parents should avoid investing in a child’s name as it has no special advantage. “If the father is the investor, the child should be the nominee and the mother should be a guardian,” he said. Also, by investing in their own name, parents retain control and discretion over the corpus once the child becomes a major, he added.
But don’t parents get tempted to dip into this pool for reasons other than their child’s benefit? Muthukrishnan says that when he sends reports to his clients who are undergoing their children’s financial plan, he labels the reports appropriately, so that the child’s name is on top of the report. “It has a psychological impact on parents and prevents them from touching this corpus for other purposes,” he said.
If you are planning to send your child overseas, you can consider investing in dollar-denominated equity funds as well. But this isn’t for everyone.
While these funds will help mitigating currency risk, the underlying investment itself can be risky. “It makes sense theoretically, but you need to be well versed with the equity market in the country you are investing in. The risks are unknown for the layperson and we don’t really advise using these funds,” said Nath.
Most planners suggest a mixture of diversified equity funds, and small- and mid-cap funds depending on your risk appetite. Though fixed income options like tax-free bonds (10-15 year maturity) and Public Provident Fund are available, they aren’t appropriate to grow wealth and don’t give above-inflation returns in the long run.
Now, if you haven’t planned early for your child’s higher education and find yourself with only 2-3 years at hand, it’s best to go for products where the payout is relatively stable such as fixed deposits or fixed income MFs. However, keep in mind that you will have to save much higher amounts.
Marriage is another goal that some parents want to plan for in advance for. Here, too, start saving early. In the Indian context, given the focus on gold when in comes to marriages, you could accumulate gold in small quantities (with the purpose of using it).
“The new gold bond scheme is a good option since you earn interest along with buying a security which is a securitised substitute for gold,” said Khyati Mashru, founder, Plantrich Consultancy LLP, a Mumbai-based financial planning company.
Should you take a loan?
An option to take care of the shortfall in education or wedding costs is to take a loan. But financial planners are divided on this. “Parents shouldn’t put pressure themselves to accumulate a corpus. As we reach closer to the goal, if there is a shortfall, then parents can take a loan. Once the kids get jobs, they can help their parents repay the loan,” said Mamaji. However, others say parents should not disturb their own retirement planning. “A loan can help and the parent should make provisions to save towards interest repayment rather than leaving it only to the child,” said Mashru.
However, Srinivasan doesn’t agree. “To a large extent, we dissuade students and parents from availing of education loans. It curtails the child’s freedom because repayment starts immediately after education and the child has to get a job,” he said. Srinivasan cited the case of a client’s son had gone to the UK to pursue a Master’s degree in law in 2006. In 2008, when the boy graduated, he couldn’t get an appropriate job and so wanted to study something else till the time he could get a proper job in the UK. He didn’t want to come back to India, but because he had taken an education loan, he had to return and he started working here in a law firm.
Taking an education loan should be the last resort, said Bhatia. “Servicing interest payments can become a burden,” he added.
Personal loans, too, come with high interest rates. So, do the math and assess your repayment capability before taking a loan.
Mint Money take
There is no substitute to starting early and being regular. Once that is done, it’s just a matter of choosing products. Rules of investing are simple: in the long run, grow your wealth, and for the short term, look of products that can add to regular income. So, plan for your child’s future through a simple yet thought out process of goal-setting. - livemint
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