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How and when to invest for your child
Hemant Rustagi, Moneycontrol.com | August 24, 2006
All of us want our children to get the best education possible. By having a financial plan in place, you can make it possible for your child to have better options, both in terms of deciding the type of education as well as selection of colleges.
To achieve this very important goal of your life, investing early is a very simple yet powerful method. The earlier you start, the longer your investments have time to grow.
There are many who do not consider it necessary to start investing for their child's education when he or she is in pre-school. However, the fact is that investing early ensures that there are no short falls in the targeted amounts.
Besides, since building up assets for your child's education is a long term objective, it is important to ensure that you invest in those options that have the potential to give you better real rate of return i.e. returns minus inflation. This factor is crucial considering the escalating costs of higher education.
Remember, the way you save as well your investment strategy will depend on many factors like how much you wish to save, how long until the money is needed, and whether you have a lump sum or will be saving out of your current income.
Mutual funds can provide an excellent investment vehicle for your child's education. They offer diversification, flexibility and simplicity. Besides, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your child's education.
Depending upon when you begin investing for your child, here are some model portfolios:
1. Age of the child: Newborn to 5 years old
If you start investing at this stage, you allow your savings the maximum time to build up assets for your child's education. With time on your side, you can take higher risk and go for equity funds. However, if you choose to invest on a regular basis, try and increase the amount every year.
2. Age of the child: 6-12 years
While a part of the portfolio may still focus on aggressive investment options like equity funds, you will do well to include balanced funds also to reduce risk. The attempt should be to move money to lesser volatile investment options, as the child grows older.
3. Age of the child: 13- 18 years
At this stage, it would be advisable to invest in funds that are least volatile and overall the focus should be on preserving capital. Also, liquidity should be an important consideration while working out the strategy.
While the open-ended mutual funds will ensure that the money is available to you as and when you require it, the key is to make the money grow at a reasonable rate.
As mentioned earlier, for those who wish to take the equity fund route and invest on a regular basis, a Systematic Investment Plan (SIP) is the best. It is a proven fact that a steady plan both in terms of savings and investments helps pursue financial goals.
What SIP really means is that you invest a fixed sum every month. When you invest a fixed amount, such as Rs 5000 a month, you buy fewer units when the share prices are high, and more units when the share prices are low.
Besides, you take advantage of the fact that over a period of time stock markets generally go up, so your average cost price tends to fall below the average NAV. This "averaging" ensures that you buy at different levels, without having to worry about the market levels.
Here are some important points to remember before you establish your regular investment programme:
For those who may not want to invest the entire money in equity funds, there are certain other options. Some of the mutual funds have established dedicated balanced funds for children, where in one has the option of investing in a ready made equity-oriented or a debt-oriented fund. Here is a glimpse of what these funds have offered to investors over a period of time.
(Past performance is no guarantee of future performance).
So, go ahead and start planning for your child today. Mutual funds have the right options to suit your requirements and the ability to help you realize your dreams.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at email@example.com
For more on mutual fund investments, log on to www.moneycontrol.com.