After your child is born and once you hve taken care of insurance needs and updating your will, then the next step is to invest for his or her future.
Investing monetary gifts
At birth, the child invariably receives gifts in the form of money from family and friends. Unless this amount is stashed away in a proper investing avenue, it is likely to be frittered away or left idling in a bank account. It is a good idea to invest this money for the baby’s longterm goals and let compounding work its magic. You could invest it in an equity fund or in the Sukanya Samriddhi Yojana.
Meeting short-term goals
While there is a definite rise in expenses after the child’s birth, parents typically fail to take into account the array of short-term goals in the first few years. “After the initial 10% rise, there’s another 10% increase in the budget after 3-4 years when the child’s education starts,” says Maalde. In between, however, there are other money-guzzling events like ceremonies and functions linked to the baby’s naming or baptism, the first birthday party, which is generally celebrated with gusto by the family, the start of playschool at 2-3 years, and finally the admission to a proper school at around four years. For each of these goals, a large corpus of Rs 50,000-3 lakh may be required.
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Data as on 28 May 2018. Gold and mutual fund returns for 5 years. Sources: Value Research, Morningstar, ACE Equity. Real estate returns for 8 years. Source for real estate returns: RBI HPIndex
Instead of trying to break an investment or strain your cash flow, or worse, take a personal loan, plan for it even before the baby arrives. “Facing peer pressure and trying to avoid social stigma, people tend to take expensive personal loans for such occasions, which should be avoided,” says Vyakaranam.
Fix the amount you are likely to spend and start investing it instead of letting it idle in a bank account with 3-4% interest. “Put it in the less volatile liquid fund or an ultra short-term fund, or even a recurring or fixed deposit, for goals that are a year or less than a year away,” says Pai. For goals that are 3-4 years away, you can invest in debt funds. Mahesh is planning to start saving nearly Rs 10,000 a month for his four-month son’s first birthday, for which he intends to spend nearly Rs 1 lakh. “Have a bucket for each goal and don’t substitute any of these,” advises Vyakaranam.
Meeting long-term goals
The two nonnegotiable, long-term goals for most parents include higher education and wedding of their child. While looking for an investing instrument for these, consider two criteria. It should offer high returns over the longer time frame in order to beat the eroding effect of inflation, and it should enforce investing discipline so that you don’t dip into the corpus for any immediate need. “Ideally, you should have a portfolio and invest as per the risk-reward profile. So for short-term goals, have more debt than equity, and for long-term goals, have a higher exposure to equity,” says Vyakaranam.
Kirat and Nirbhay follow this advice well. “I have three buckets based on risk. So there are fixed deposits, PF, gold and Sukanya Samriddhi Scheme in the low-risk bucket, mutual funds in the medium risk, and stocks in the high-risk category,” says Kirat. Richa and Vikrant too have spread their investments in real estate, mutual funds, fixed deposit and traditional insurance policies. “We want to secure our retirement through real estate, while the others can be used to fund the children’s goals,” says Vikrant.
The traditional insurance plans like endowment or moneyback may not be a good option since they offer very low returns and an insufficient cover. Real estate and gold should also be picked only for emotional value or if you already have an adequate portfolio. So, the options you can pick from are equity or equity diversified mutual funds and equity-linked saving schemes (ELSS), for equity, and for the debt option, the PPF and Sukanya Samriddhi Scheme.
Another lure for most parents is ‘child plans’, which are peddled by insurance companies and mutual funds alike. These typically fall into three categories: traditional insurance plans, Ulips and hybrid mutual funds. All such plans are prefixed with ‘child’ to lure anxious parents keen to save for their children and acts as a psychological barrier for them to redeem, sell or dip into these during the investing tenure.
While this is a good strategy to keep parents invested, it is important to understand that these are not different from other plans in their categories. So a ‘child mutual fund’ is essentially a hybrid or balanced fund with equity or debt orientation. Similarly, a Ulip is a unit-linked insurance plan, which combines insurance with investing, has a lock-in period of five years, very high initial charges and reasonable returns only after 10-15 years. The bottom line is that instead of blindly picking a ‘child’ product, understand what it offers and then decide.