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How to give your child a head start

By Nimesh Shah
September 09, 2014 14:43 IST
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The hard truth is that unless you start investing for your children in advance, in appropriate investment avenues, you are risking their future aspirations, Nimesh Shah.
Parents always want the best for their children - a good education, a grand wedding and a secure future - but best things in life come at a price. Today, private schooling, engineering or MBA from renowned institutions could run into lakhs. If you have not saved for your child’s future, either you would exhaust your retirement kitty or be knee-deep in debt. But question arises - is saving enough? The hard truth is that unless you start investing for your children in advance, in appropriate investment avenues, you are risking their future aspirations. However, if you are financially planning for milestone events in their life, you are taking the right step towards securing their dreams.

Start early

Firstly, find out how much your child’s education or marriage will cost and align the financial goals with a defined time frame. As rising inflation can chew into your portfolio returns quantify your goals while accounting for inflation. For example, if education in a renowned engineering college today costs Rs 500,000 per annum, it will not cost the same, maybe 10 years down the line. The earlier you start, the more time your money can benefit from ‘power of compounding’.

If you invest with the horizon of 5-10 years, a larger portion of investments for kids should be held in equity. Over shorter-term, equities could be volatile but over longer term, equities have potential to outperform other asset classes and deliver superior returns.

Pick right instrument

To meet long-term financial goals, equity is necessary in the portfolio, however, jumping straight into equity markets, without knowledge and expertise, may not be prudent. Therefore, utilise the mutual fund route to derive benefits of professional management at low cost. This is where child care mutual funds come into picture. These schemes are specifically designed to give your child a head start in life by leveraging opportunities and dynamism of equity and debt markets.

Such funds invest more than 65 per cent of the money in equity and equity related securities to leverage growth opportunities, and remaining is normally invested in debt securities to seek stability for your investments. Having more than 65 per cent investment in equities apart from offering better returns also ensures taxation efficiency since investments made in such fundsare exempt from capital gains tax provided investments are held for more than a year.

Get asset allocation right

These mutual fund plans come with aggressive as well as conservative variants; you can choose either of them depending on investment horizon. If you start investing when your child is far away from a particular milestone, invest in aggressive child care schemes with higher asset allocation to equities. While if you are closer to your child’s financial goal, you might want to have stability; therefore, it is better to optfor a conservative approach. In a nutshell, investing for children requires systematic approach of high exposure to equity in child’s formative years and increasing exposure to debt funds in the later stage.

Nimesh Shah is MD & CEO, ICICI Prudential AMC

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