Savings for Children – 5 Ways to Save for Your Child’s Future
Almost all parents save for their children (more than 70% start before their child reaches 3 years) but the catch is to plan well so that so have sufficient money at the right time. Despite saving for children almost 37% parents still feel that fulfilling their children’s need might be difficult (as per a survey carried out by economic times.com for ET Wealth).
Try and recall the advertisement by an insurance company being aired (in India) currently:
An office attendant helps a senior executive who is in distress because food is stuck in his throat. The executive thanks the attendant profusely and remarks that the guy should have been a doctor.
The attendant says “I could have been a doctor if only my father had sufficient money at the right time”
Though a little flippant the advertisement does manage to convey the message; your child’s dream should not suffer because you did not plan well.
When choosing an investment it is important to keep in mind:
- Tenure of the Investment
- Risk associated with investment
- Estimated returns.
Exploring Various Options
The market is filled with various products some of them are specially designed for saving for children; it is best to pick a judicious mix of products so that your portfolio is diversified and you earn good returns and yet are safe.
1. Insurance Plans
One of the most advertised products for planning a child’s future and savings for children are insurance products. Insurance products have the advantage of being a long term investment and also offer tax advantage.
However keep in mind that the insurance cover should be taken for the parents and not for the child because that kind of defeats the purpose. The returns on these plans are not usually very good but they manage to secure the child’s future.
Choose a plan that provides for the child’s education when the parent is no more; these plans should ideally be bought when the child is very young so that even if the parent is not there the child’s education is taken care of.
2. Mutual Funds
There are a variety of mutual funds available in the market. Some are specifically targeted at Savings for Children; however it is not essential that you stick to them.
You can choose a systematic investment plan where you invest a specific amount every month; it is a good idea to invest in two different types of funds to get the best results.
Investing in a fund that has blue-chip company stocks in its portfolio or an index fund is a good idea. These tend to give good returns in the long run.
You can start investing gold ETFs right from the time when to child is born and you can continue till the age of 10-12 years.
By commodities I mean investing in gold or silver as precious metals continue to be one of the safest options to invest in and generally offer good returns. There are various ways to invest in gold; gold coins of various denominations are available; gold ETFs are a good option and so is e-Gold.
For investment purpose jewellery is not a good option as at the time of selling usually some deduction is made; e-Gold and some exposure to certified gold coins is a good mix.
Investing in direct equity is one of the best ways to create wealth for funding your children’s needs. Historically the stock markets have proved to yield the highest returns in the long term.
A word or two of caution; choose stocks well. You do not want to invest in stock only to find that the company has disappeared by the time you need the money.
Also do not rely solely on tips and choose the stocks after careful evaluation, rely on reputed companies. Though you are investing for a long term but it is still important to keep reviewing the performance of the stocks that you have invested in; if required exit while there is still time. This can be ensured that you do not choose too many stocks; pick a few good companies and keep an eye on their performance over the years.
Investing in equity should be done aggressively till the child turns 10 as initially you can afford to take risk; after that reduce the exposure to equity.
5. Fixed Deposits
Almost 45% of the parents invest in fixed income products that include fixed deposits. Though these products are safe and sometimes offer liquidity but their returns is very low and often the actual return (after considering inflation) might be negative so investing solely in fixed deposits will not help. If you really must; invest a very small proportion of your child’s fund in it initially.
After the child reaches the 12-14 then one should start shifting the money invested in equity to fixed deposits as hopefully the wealth creation has happened over the years and now is the time to stabilize. You do not want your money to be caught in the bear phase when you need.
Conclusion – Savings for Children
The actual portfolio will depend on your risk appetite; when you begin to Save for yourChildren (if you start after your child turns 5 you have much lesser time to invest in equity so you might have to continue it till later than suggested, when you think you would require the money (everybody may not require it 18) etc. Invest wisely so that you can help your child fulfill his/her dreams!