Children, they say are God’s gift to us. God did his job but we as parents have ours left. Investing for your child’s future is the onus of parents and fortunately in India, parents take this seriously.
The only issue is that they start investing in the wrong products and that is probably because they have not done their financial planning yet. Don’t panic – here is a guide on investing money for your child.
I have tried to break this down phase wise till the child starts earning. I hope you find this useful and this helps you immensely in investing for your child’s future.
Investing for your child’s future till pre-school
As soon as your child is born, your expenses shoot up. Emotional exuberance is at a all time high and you shop till you drop. It is at this time that you also need to take stock of your finances and start investing money for your child.
The best option to start with is a Public Provident Fund or PPF. This is one of the most important, safest and must have investment for your child. Note that the amount of investment in the PPF needs to vary – you cannot assume here that you need to throw in the maximum Rs 1 lakh in it. You also need to understand that this is for long term goals.
When a child is born, there is a lot of gifting that happens. While some like to gift toys and other baby products, others especially close relatives give cash. Most of the parents including yours truly, have been guilty of spending that money. In order to use it in the best means possible, open a kid’s bank account and begin to park all such gifted money in it.
Note that any money that comes in this bank account can be channeled into investments for the child – say the PPF account which was opened.
In India, kids are often gifted gold by parents or siblings. This is very common on birthdays, especially the first big bang one ! By accepting these gold-en gifts, you are implicitly investing. In fact, gifts from your side can also be gold products. And if it’s a girl child, diamonds !
The child will eventually go to day care and school. If you want to keep aside money for that, begin to sue suitable debt products. Even a recurring fixed deposit will serve the purpose.
Most of the parents don’t save for school expenses and consider it as an expense from their income so they don’t explicitly plan to park the money that might be needed for the child’s schooling. If it is required, use recurring FDs or short term debt products.
For all the long term goals of the child like college and higher education and marriage, do goal based investing in equity. Read up on how to do equity investment and why long term investing works best in such a scenario.
While direct stock trading is an option you can explore, better park a big amount of your monthly surplus in equity diversified mutual funds via systematic investment planning of mutual funds. You go in for a healthy mix of small cap, mid cal and large cap mutual funds when investing for your child’s future.
Note that as parents, you still have the responsibility to take care of other below important things. Miss any of these and your family is bound to suffer.
1. Ramp up your insurance cover by taking a term insurance. Your liability has increased with the new born kid.
2. Include your new child in your health insurance cover.
3. Try not to invest in Unit Linked Insurance Plans or insurance policies that are geared up towards investment for children. You will be milked high and dry by insurance agents and riding high on your child-emotional-exuberance, you might cave in to their demands. Don’t make a mistake here that will cost you big time.
4. Make a will and name your spouse and child in it.
Investing till high school
This is the stage when your expenses begin to shoot up the curve. But thankfully, time spent at the office in graying your hairs is also fetching you some added income to take on the increased expenses.
You still need to continue doing most of the things that you started for investing for your child’s future – investing for long term goals via mutual funds, putting away gifts in the child’s bank account, investing in PPF, gifting gold on birthdays and others mentioned above.
I must admit that this can be the most challenging phase for a parent. The child is moving to be independent and his/her demands will always fall short of what the parent is offering. Birthday parties and outings will be more frequent and pocket money expenses will grow steadily.
But this is the time when you need to introduce the child to money matters. You should begin to educate and teach the child about how to handle a debit card and cheque book. Logging into online bank accounts can come a bit later on but that is a must as well as it teaches your child to see how the account is debited and credited.
What is on your radar during these years is the college expenses that you will incur depending on where your child wants to go.
Depending on when you start investing in this, go in for a healthy mix of equity and debt. As soon as you are 3-4 years away from the child going to college, move the corpus to debt investments as capital protection is more important at this point than returns.
Note that as you progress the years towards end of high school, you need to begin to move away from small caps and mid caps to large cap mutual funds. The small and mid caps were used to give a kicker of returns with time on your side but now that the goals are coming nearer, the idea is to move into safer investments.
Note that the PPF could be nearing its end term and you can withdraw from it for your child’s college expenses.
When the child nears to end of high school, you can begin to contemplate a separate health cover for him. This is not an absolute must but might make sense depending on a case to case basis.
A family floater health insurance with adequate sum assured will do the trick but do check at your end.
This is also the time when you can begin to think of putting in money in Gold ETFs for long term goals. But keep this limited only to a maximum of 3-5% of the portfolio.
Note that the physical gold that you got as gifts might not suffice his/her needs in the future, so this might come handy then.
Investing while (s)he is in college
Once your child has moved to college, you have probably used up all the savings meant for his education. But this is also the time when you need to re-assess whether he will go for a higher education like MBA or not.
A lot of kids go for higher studies straight after their graduation while others do a job for some years and then take the plunge. Depending on which category your child falls in, the goal will become either short term or long term. Even if it is long term, consider it a maximum 5 years and then invest.
If you assess at this point that the money you have saved for your child’s higher education is not enough, then do not take the shortfall from your retirement savings.
Either have your child take a educational loan or look at alternatives like the child working for some years to accumulate the money before he can go for higher studies – if you as a responsible parent have inculcated in him good money habits, he will understand.
At this point of time, the only future goal that you need to keep saving for your child is his/her marriage. Depending on when that happens, invest in the right products but avoid lock in products like PPF here. In fact, the PPF will be nearing its 15 year end term and you can look to use that money for his marriage, if it is not already used for any other goal.
In case you have no clarity on where the PPF is going to be used, then extend it for 5 years by which time more clarity can come for your child. And our course, continue with the Gold ETFs.
If you do all these things smartly, you will come away as a happy and successful parent and then plan for another innings of investing money for your child !