Financial planning and your child

Having discussed 'why and how' you should go about planning for your child's future, we now shift our focus to the avenues that you should deploy. Avenues like equities, mutual funds, fixed income instruments and insurance products should all feature in your child's financial planning portfolio. Even if you were planning for your own retirement or providing for other objectives like buying a property, the same avenues would have featured in your plans, although in varying proportions.

Equities
Various studies have shown that over longer time frames (more than 10 years), equities are equipped to outperform other asset classes like gold, fixed income instruments and property among others. However over shorter time frames, equities can prove to be the riskiest asset class. Investing in equities would imply buying shares/stock of a listed company.

This in turn would involve understanding the future business prospects of the company, being aware of the various economic, legal and political factors that can have an impact on the company's business prospects. Also studying factors like interest rates and competition (domestic and overseas) would be vital.

To most, that would seem like a full time job. And it is! That's a job best left to experts like money managers and research analysts. Hence, retail investors on their part would be better off utilising the mutual funds route for investing in equities.

Mutual funds
Mutual funds are perhaps the most versatile investment avenue available to investors. Retail investors can participate in diverse asset classes like equities, debt, gold and even property by investing in a mutual fund scheme. The best part is that the 'investing and management' part is left to the experts i.e. the fund managers. Investors can avail of the fund manger's expertise by paying a charge in the form of loads (one time) and expenses (annual).

Investors have a large variety of traditional mutual funds to choose from i.e. diversified equity funds (which invest in stocks across sectors), balanced funds (which invest in both equities and debt in a pre-determined ratio) and debt funds (which invest only in debt securities). Other interesting products on the anvil include gold funds (which invest in gold and gold-linked securities) and real estate funds (real estate/property) among others.

Furthermore, there are mutual schemes specifically launched for providing for children's future needs. These schemes have longer investment horizons and the fund manager makes long-term investment decisions commensurate with the investment horizon. Subject to availability of the right investment advice, investments in mutual funds can go a long way in helping you achieve financial objectives set for your child's future.

Fixed income instruments
As the name suggests, fixed income instruments yield an assured (fixed) return on maturity. Hence, unlike market-linked investment avenues like equities and mutual funds, investors in fixed income instruments are explicitly aware of the returns their investments will generate. Fixed income instruments have the ability to impart a degree of stability to the portfolio.

Conventionally, fixed deposits issued by banks have been popular investment avenues in this segment. Similarly, small savings schemes (popularly referred to as post office schemes), like Public Provident Fund and National Savings Certificate can also feature in the portfolio.

PPF in particular merits mention since it has a 15-Yr investment tenure and offers tax-free returns on maturity; furthermore, contributions to the scheme are eligible for deduction under Section 80C of the Income Tax Act. The scheme's investment tenure (15 years) makes it ideal for building a corpus for your child's future needs. However, a disclosure is warranted here - since the interest rate on PPF investments is subject to change, returns are assured but not fixed.

Fixed Maturity Plans are another avenue, which investors should consider. FMPs aren't fixed income schemes in the strictest sense; in fact, they fall under the mutual funds segment. However, their structure is reasonably similar to fixed income schemes. FMPs have a fixed investment horizon and investors are aware with a reasonable degree of certainty the returns that their investments will generate on maturity.

Insurance
Broadly speaking, insurance products can be categorised into those offering only insurance cover (term plans) and those offering a combination of returns and insurance cover (investment-linked). Endowment plans and unit linked insurance plans fall in the latter category. Products of both the aforementioned varieties should find a place in your portfolio.

For example, term plans can ensure that the nominee (in this case, the child) is provided with a substantial insurance cover at a low cost in case the insured (the parent) meets with an eventuality. Conversely, investment-linked avenues like endowment plans and ULIPs, which invest in equities, can go a long way in helping you build a substantial portfolio over longer time frames.

Having discussed the various avenues that can be utilised for building a corpus for your child's future needs, readers would do well to appreciate the importance of sound advice and asset allocation. Eventually, your investment advisor and his ability to short-list the investment avenues that are right for you, will play a significant role in determining how successful you are in achieving the financial goals that you have set for your child. Hence it is vital that you associate yourself with a qualified and expert investment advisor.

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