In Part-1 of this article,
posted 4 days back, we had dealt with planning for the children for the long
term wherein general strategy and points to be kept in mind had been discussed.
As already brought out, one
needs to start saving as early as possible. This has four huge advantages – you
only need to save a small amount regularly, you are able to ride out the
periodic ups and downs easily as there is enough time-cushion available,
mid-course corrections can be easily implemented and most importantly, power
of compounding works for you in an astonishing manner.
Having understood this, the
most important question that faces you is how and where to invest? When the parents think about the child’s
future, the primary thoughts are about their education and marriage.
Most parents are aware of how expensive higher education has become today and
compounded by Inflation, it would be out of reach of many if not meticulously
planned for. This is the primary reason that most of them want to start saving
so as to create enough resources to give their children dream education. This
may even include higher education abroad. In this article, we will
deal with these aspects specific to your child, taking age-wise scenarios.
Characteristics of Various Investment
Products
There are a
bewildering variety of products available in the market, each one of them
catering for a specific need which should be carefully understood. If we use a
good product for something it is not meant for, it is bound to fail us – you
cannot use a gun to kill a fly or a butter-knife to cut wood! The products that
can be used for planning for your child along with their general characteristics
are as below:-
1. Life Insurance – As the name
suggests, it is meant for insuring life and not for saving. Generally,
traditional policies, like money-back and endowment plans, give you returns in
the range of only 6-7% per annum which is much less than inflation itself. One
should not expect it to create wealth for you in the long-term. Unit Linked
Insurance Plans (ULIPs) can be equity market-linked but their high upfront
loading combined with barriers in switching out if they do not perform, make
them unsuitable compared to other products for meeting long-term goals. ULIPs
would give you decent returns only after about 6-7 years of continuous
investment.
2. Debt Products – These
fixed-return products like Bank FDs, Recurring Deposits of Banks and Companies,
Provident Funds (PPF, DSOPF, EPF etc), Bonds and Debt Mutual Funds, generally
give you returns equal to inflation. This implies that it is likely to fare
better than Life Insurance, but will only preserve your capital. Eg, if PF rate
is 8.6% pa today, the inflation is also on the same lines. Your Rs 100 in these
instruments will become Rs 108.60 next year, but then price of everything will
also increase to that amount next year. Thus, the purchasing power of your
money in these instruments has practically remained the same! However, the
safety and security of capital provided by these instruments is a big plus.
Therefore, some amount of your savings for the child should go into such safe
instruments too.
3. Gold – While Gold has had an unusually good run in
the near past, it has largely been due to the unstable economic conditions in
large parts of the developed world, which may or may not be sustained in future.
Traditionally, Gold has at the same rate as inflation in India and thus, is considered
a long-term hedge against inflation rather than a wealth builder. Also, to look
at it as something which will fund a child’s education or marriage may not turn
out to be so since normally Gold in Indian households does not get sold to fund
goals except marriage!
4. Real Estate – Real estate
has the potential to give good long-term returns provided a good property is
identified well in advance. This can be tricky but plenty of success stories
abound. However, own Home and a second property to provide good rentals to take
care of your Retirement Planning take priority while using this route to plan
for your goals. The bulk investments required in real-estate may also be a
deterrent and not be very conducive to using your small monthly savings. There
is sometimes a tendency to concentrate all resources in this asset class, which
is not a good long-term strategy and can bounce back.
5. Equity-Linked Products – It is a
well-known fact that Equities (ie,
stocks or shares) and equity-linked products like Equity Mutual Funds (MF) outperform
all other asset classes over the long term. If you lack the expertise to invest
in equities directly and/or find yourself unable to follow the turbulence of
stock markets and take timely corrective actions like exit/ additional purchase/
rebalancing, take the MF route. MFs are one of the best regulated instruments
in the market today, they don’t need your day-to-day involvement, offer
excellent long-term returns, are very liquid and lend themselves to small
regular contributions. Maximise your exposure to such instruments for achieving
the education and marriage goals of your children and keep putting the excess away
in them as your income increases. However, remember that you should be
comfortable with the short-term volatility of such equity-linked products
before you take this step.
Prescription
for your Child as per the Age Bracket
The first and foremost
requirement remains taking an adequate Term
Insurance Cover for yourself so that your child’s future remains safe -
with or without you around. The future insurance need has to be carefully
calculated in terms of amount and time-period and insurance cover already taken
to be subtracted from it. Remember that the tendency to look for ‘returns’ or
‘money-back’ from an insurance policy is self-defeating – you do not expect
money-back from your car insurance, then why from your life-policy? Such
‘returns’ only make it unacceptably expensive.
Child 0 to 6 Years: There is plenty of time available for saving
for your child and is, in fact, the ideal time to start. Nothing will work as
well as Equity-linked products here. While debt products will provide safe
option, you will not be able to meet the goals as comfortably or surely by
investing only in them. Depending on your risk-taking capability, you should
take a mix of the two in a ratio of anything from 0:100 to 40:60 for
debt:equity products to reach your goals.
Child 6+ to 12 Years: Whatever is
true for above age bracket holds true here too, the only difference being that
goals are closer now. The debt:equity ratio essentially remains the same.
Rebalancing and constant monitoring of the equity-linked products continues to
be very important here too to create the required wealth. Adequate Term
Insurance, if not already taken, remains a necessity.
Child 12+ to 18 Years: Now the
education goal could be very close, maybe less than 3 years away for
Graduation. There is a need to consolidate and preserve the gains made in
equity / equity-linked MFs now. Hence, the money earmarked for Graduation
studies’ goal should be moved gradually to debt products while that for the
Post-Graduation and marriage goals should continue to grow in the equity /
equity-linked MFs.
Child 18+ to Pre-Earning Years: The
Post-Graduation goal could also be coming closer and the money earmarked
thereon should be moved to safer avenues. Marriage expenses may continue to be
invested in equity-linked products if there is still adequate time available –
at least more than 3 years.
Earning Child: The child should
start taking the burden of his/her future expenses now, including higher
studies. Since the age is young with plenty of earning years to go, the
investments should primarily be in equity-related products except for some debt
products like PPF, where safe tax-free returns build up gradually and counter
the volatility of equity products to some extent. Systematic Investment Plans
(SIPs) in equity-diversified MFs would work the best here. The child should be
encouraged to start his own investments now.
The End-piece
A child brings a lot of joy and happiness
to the family. But with this also comes the realization of responsibility of
parents towards them. A lot of dreams emerge with the child being the centre of
those dreams. From here originates the need to create a financial base that
would ensure the future of the child in all respects. It is essential that
investing decisions are taken with due deliberation – seeking professional help
would benefit you far more than it would cost you in the long-term. Investing
portfolio for the child should be diversified to accommodate the positive
points of each asset-class as also to de-risk it. Equally important is its
periodic review and rebalancing. Remember, there are no automatic
‘fire-and-forget’ solutions and nothing but the best should accrue to your
child!!
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