Saving for children’s future

Culturally, Indians are entrenched in family values and it doesn’t come as much of a surprise that securing one’s children’s future sits at the top of most parents’ priority list. Making sure that the coming generation has a superior quality of life and better opportunities is what all parents want. Here are some most common questions parents have while planning for their child’s future and their answers.

Mistakes people make while saving for children?

Most parents opt for children’s insurance plans and feel they have secured their child’s future. A children’s insurance plan is a very inefficient way of saving money for your child’s future. In fact, setting aside money for your child’s goals like education, marriage can be achieved by investing in mutual funds or any other any investment avenues.

Another mistake parents make is to start planning for the child’s higher education only when the child has already neared the age of starting college. By then it is already too late to start building a corpus for higher education and they start eating into their retirement corpus. One of the biggest mistakes parents make is not to ascertain how much money they would need for their children’s goals. They tend to overlook the impact of inflation and how it will increase the financial requirements for their child’s education and marriage.

Long-term vs short-term goals

While higher education and marriages are big expenses in the long run, there are many expenses that come up in the short term. School fees and other extra-curricular expenses have skyrocketed. These recurring costs may not look big taken alone, but over a period they will significantly impact your family’s budget.

Be it your child’s school fees, higher education or marriage, prepare an estimate of how much you would require for each goal and when you require it. Start saving and investing towards these goals through monthly SIPs (systematic investment planning) from the time of the child’s birth.

MFs & goals

The first step would be to ascertain the major milestones you want to plan for – graduation, post-graduation and marriage. All of these require a lot of money and you will greatly benefit if you start investing for these milestones well in advance. If you start investing a small amount from the time your child is born, you will have considerable time to build a good corpus for your child’s education and marriage.

For long term goals (more than 5 years away) you should invest your money in Equity mutual funds, which will help your money grow and achieve these goals. For expenses that you will incur for your child within 3-5 years, like your child’s schooling, can be invested in debt and balanced Mutual Funds. When it comes to short-term goals, there isn’t a lot of time for your investments to grow, as you may need the money in 1-2 years. For such goals, it is advisable to keep your money in a liquid, arbitrage fund.

However, there is a pressing need to gain a holistic view of one’s overall situation prior to creating any plan. The best thing to do is to get in touch with a financial planner to help you streamline your finances in way that helps you achieve your goals.

Real estate & kid’s life goals

For most people in India, buying real estate is not just an investment, but also a dream goal. While we feel we own a physical asset that we can pass on to our children or sell to fund our children’s education or marriages, the truth is that real estate is not such a lucrative option any more.

Real estate had a great run from the 1990s to 2008, and most people who talk about real estate giving great returns, are talking from their experience during this phase. However, after 2008 the real estate market has performed abysmally. The equity markets have outperformed the real estate markets by a great margin from 2009 to 2016, when it comes to capital appreciation.

Therefore, though people view real estate, as a source of wealth creation and value appreciation, in reality the picture is very different. So as an investor, it is better to invest in mutual funds than real estate. Mutual funds are a much more liquid asset. It is not easy to sell real estate when the need arises.

Buy property for residential purpose rather than investment. Do not go overboard buying two or more properties thinking about retirement or kid’s needs or wealth creation. Look at building a more liquid, tax efficient investment portfolio with mutual funds.

Ulips or endowment plans

People are made to believe that any product that is labeled as “children’s plan” is the best option for their children. But as parents you must not fall for child specific insurance products and “children’s plans”. Keep your insurance and investment decisions separate. The plan should be to cover risk through pure insurance products like term plans and opt for mutual funds for the purpose of investment.

The most important thing for a parent is to plan for your children’s goals and start investing towards them in a consistent manner. This will help you realise the bright future you envision for him/her and safeguard your family’s financial future.

(The author is CFA and founder of HappynesFactory.in)