Saving for your child’s future needs is one of your most important
goals in Life
as also your Bounden Duty
as a parent
Remember Farhan Qureshi in the 3 Idiots? His father planned out
his education and career the day he was born. The senior Qureshi's career
choice may have been out of sync with his son's passion for wildlife
photography but the underlying objective — to secure the financial future of
his child—was bang on target. An increasing number of Indian parents are doing
that today.
According
to the survey, 63% of the 1,908 respondents said they started saving for their
children's education when they were born. Another 9.2% had started even before
the kid was born. That's good news, because the earlier you start, the more the
time available for your investments to grow, and the bigger the corpus. But are
Indians choosing the right options when investing for their children? Here's
the bad news. An overwhelming majority is opting for low-yield instruments.
Almost 45% of the respondents in survey said they invest in the Public
Provident Fund (PPF) and fixed deposits for their children. Another 38% have
invested in traditional insurance policies.
"Despite
the numerous options available, Indian parents continue to rely on bank fixed
deposits due to lack of awareness," – laments a Financial Planner. The
encouraging part is that 43% also invest in equity mutual funds and stocks for
their children, while 26% have opted for child insurance plans that provide for
the education of the child if the parent is no more. The skew towards low-yield
products also means that many Indian parents might fall short of the targets
they have set for their children's investments.
Estimated
that in raising a child in urban India from cradle till college costs roughly
Rs 55 lakh. The calculation assumes that the child will take up a professional
course costing Rs 10 lakh. This is the cost at today's prices and the amount
has to be adjusted for inflation. Now comes the scariest part. Education costs,
which constitute nearly 46% of the total expense on a child, are growing at a
worrying pace of 20-25% per year.
Formulating a Strategy:
Fortunately
for parents, there are enough investment products to help them fulfill the
dreams for their children. Chosen appropriately, these options can help you
save enough to send your daughter to the best medical college in the country,
or book a ritzy 5-star hotel for your son's wedding. How does one choose the
right product? The first thing to understand is that there is nothing to
differentiate the investments made for children from the rest of your
portfolio. They are exposed to the same risks, offer the same returns and are
taxed at the same rate. No mutual fund will give units at a discount or offer
guaranteed returns just because a parent is saving for his child. No bank will
offer you a higher interest rate. No insurance company will charge a lower
premium. The taxman too will not exempt any income. So, the same rules that
govern your own investments should apply to those made for your children.
Your
choice should depend on four basic factors: the tenure of the investment, the
risk you are willing to take, the returns offered by the option and the
taxability of the income. Here's how these four factors can affect your
investments.
Tenure
of investment: Are
you saving for your daughter's education? Or for your son's marriage? Financial
planners say it is best to define your goals and segregate the investment for
each goal. "Since each goal has a different time frame, separating them
will allow the parent to choose the most appropriate investment to reach that
goal," The stock market has historically been the best place to park your
money for the long term. There are enough studies to prove that equities give
the highest returns in the long term.
Risk and returns: Every individual has a different risk
appetite. Equities are certainly a great option for creating wealth over the
long term, but what good is this money if it leaves you tossing and turning in
bed, agonising over how your investments are faring. So choose an option that
suits your risk tolerance. For this, first get your risk profile assessed by a
financial planner. In many cases, one does not even know how much risk he can
take. "Most parents adopt a very conservative approach when it comes to
investing for their children. This
attitude is rooted in the choices their parents had made and is difficult to
shed.
Higher
the risk you are willing to take, the higher your returns could be. Then again,
your ability to take risks depends on the time available. As we mentioned
earlier, stocks and equity funds work best for long-term goals. However, if you
are saving for your son's marriage in 2013, steer clear of volatile stocks and
put the money in a debt fund, or even a fixed deposit.
Taxability of income: Keep in mind the income tax rules that
apply to your investments. Your child's income is actually your own. This is
also the reason why PPF and insurance policies are so popular with investors.
The income from these options is tax-free, but there are other tax-efficient
options as well. For instance, the income from equity and equity-oriented
mutual funds is tax-free after a year. Investments in other funds can help you
defer tax for years, even decades.
When
you take into account these factors, the investment portfolio for your child
becomes a mix of short-, medium- and long-term products. Each option has
something to offer, some financial goal to achieve. Fixed deposits offer safety
and assured returns but won't be able to beat inflation. Mutual funds offer
high growth but carry a risk and don't offer any insurance cover. Child
insurance plans offer an insurance cover and help the wealth to grow but levy
high charges. Gold helps fight inflation but doesn't offer diversification.
-Excerpts from an article
in Economic Times, 18 April 2011
Just to
substantiate the article above, a calculation primer for all:-
High Risk, High Returns – A monthly investment of Rs 10,000 will
grow to:
Rate of Interest
|
@ 8%
|
@ 10%
|
@ 12%
|
@ 15%
|
In 5 Years
|
Rs 7.32 Lakh
|
Rs 7.76 Lakh
|
Rs 8.02 Lakh
|
Rs 8.62 Lakh
|
In 10 Years
|
Rs 18.02 Lakh
|
Rs 19.98 Lakh
|
Rs 22.02 Lakh
|
Rs 26.02 Lakh
|
In 15 Years
|
Rs 33.76 Lakh
|
Rs 39.84 Lakh
|
Rs 47.14 Lakh
|
Rs 60.92 Lakh
|
Equity Portion
|
0%
|
10-15%
|
35-50%
|
80-100%
|
Risk
|
Nil
|
Low
|
Moderate
|
High
|
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