Do you constantly worry about not having enough funds to support your child’s dreams and aspirations and wonder when you should start investing for your kid?
The truth is that everything from education to extra-curricular activities gets expensive by the day. You need to make sure that you have enough financial sources to fund for school, college and the various interests that your child may have in the future.
The earlier you begin to invest, the more secure your child’s future will be.
The question is where do you begin investing for your kid?
And what are the safest ways to put money away for your child’s future?
This article will tell you everything that you need to know about starting an investment for your little one.
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Why start early when investing for your kid?
Every penny that you invest multiplies at a given rate every year. The more time you have on hand, better returns you will get due to the effect of compounding. For instance, if you start saving when your child is about three years old, you will have at least 14-15 years time frame to make regular investments.
You have to start first by defining the goal for your child, whether it is about higher education or marriage. An example of a clear definition of goal is below:
I need Rs.30 lakhs of corpus for education 15 years later.
I would like to spend Rs.20 lakhs for my daughter’s marriage when she is 25 years.
Then required corpus should be calculated keeping in mind the present value of the goal, the rate of inflation, and the return expected from the type of investment you are chosen.
Delaying investing by a few years will require you to invest more every month to achieve the required corpus. So, make sure you start as early as possible.
Things to know before investing for your kid
According to a survey, management courses in leading colleges has seen a leap of 400% from 2007 to 2018. The costs of marriages too are increasing. For your child to have the best education, it is important that you begin to save from day one.
Here are some of the best investment options to consider to build a corpus for your child’s future:
- This comes with a lock-in period of 15 years. You can contribute regularly up to Rs.1.5 lakhs per annum and claim a tax rebate on that.
- The interest rate is currently about 7.9 % which is higher than what any bank offers.
- The interest that you get is tax free.
- You can invest in ETFs as a long term saving option for your child.
- Gold ETF or Exchange traded fund does not require you to buy and store physical gold.
- You can make smaller monthly investments.
- Although there is the risk of a drop in gold price, holding these funds for 10 years or more has always resulted in decent returns.
Bank and Company Fixed Deposits
- This is very much suited for you if you prefer keeping money in banks.
- The interest rate of FDs also keep varying constantly. Always lock-in your FDs for longer term when the interest rates are high.
- A great option would be to start a recurring deposit (RD) for your child, wherein a fixed amount is transferred every month for a fixed period of time. Once the RD matures, you can deposit the matured amount in a FD.
Mutual Funds Systematic Investment Plans (SIPs)
- Start a monthly SIP in some of the best rated Mutual Funds when your child is young.
- You can start with equity funds and as your child grows start shifting to low risk debt funds.
- The best part of investing through SIPs is that you can invest a fixed amount every month and average out market fluctuations in the long run.
- Always take the help of a Financial Advisor to identify the right investments for you.
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How to choose the best plan while investing for your kid
Here are some simple tips to make sure that you make safe and smart investment choices based on your requirements:
#1. Understand the time frame that you have
The choice of investment depends upon when you want the corpus. If you have a good 10-12 years, you can opt for Gold ETFs, bonds and even equity funds. However, if you only have about 5-6 years in hand, you can choose debt funds or even recurring deposits.
#2. Understand your risk appetite and invest accordingly
If you are at a stage in life where you can invest in high risk- high return options such as equity, go for them. However, if you are at a stage when you are likely to need your funds in the near future, keep it in FDs or liquid mutual funds. Bank FDs, for instance, are a good saving option even though they do not give you inflation-adjusted returns, as other investment options.
#3. Keep an eye on your investment
Every year, it is a must to review the portfolio of your investments. Sometimes, the interest rates may go up. Sometimes, they may drop. Make sure that your investments are headed towards the target that you have set. You can also increase the investment amount based on increments in your salary.
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#4. Invest in different asset classes to reach your goal
Do not stick to just one investment or asset class. It is good to diversify. Have a bouquet of investments ranging from mutual funds, shares, gold, property, fixed deposits, bonds, and others. This is possible if you start earlier and plan well.
The cost of living and the cost of education is on the rise, by about 10-20% each year. Make sure that you start early with the right mix of investments. Also, have yourself covered with a term insurance for the amount needed for your child’s education. For better planning and understanding of the investment options, you can also get in touch with a Financial Advisor for guidance.
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