This Children's day, plan for your child's future

One of the compelling reasons to invest is for your child's education. After all, a good education can provide an invaluable foundation for success through out your child's life. No wonder, despite the increasing cost, all of us would want the best education for our children. The key issue, however, is how can one save enough for this important goal and that too without compromising other financial goals.

It is important to plan when it comes to saving money for children's education. You need to consider the following when you start planning:

• Identify how much money you will need for your child's education. Be sure to consider the escalation in the cost of education over the years.

• Decide on the type of investments you will need to make in order to meet this financial requirement. You are probably best off finding aggressive investments that will provide good returns. Avoid low-interest traditional instruments.

• Monitor your investments regularly. Even though you might not need the money for 12-15 years or so, it is necessary to make sure that your investments are providing positive real rate of return on a consistent basis. Do not hesitate to realign your portfolio when necessary.

• Begin to shift your investments as your child approaches college-age. This will ensure that you won't lose any of the money that you have worked so hard to save and make it grow.

Once the plan is ready, the key issue that faces many parents is to implement the plan efficiently. To achieve this very important goal of your life, investing early is a very simple yet powerful method. The earlier you start, the longer your investments have the time to grow. Many parents do not consider it necessary to start investing for their child's education when he or she is in the pre-school. However, the fact is that investing early ensures that there are no short falls in the targeted amounts. Besides, since building up assets for your child's education is a long term objective, it is important to ensure that you invest in those options that have the potential to give you better real rate of return i.e. returns minus inflation. This factor is crucial especially considering the escalating costs of higher education.

Mutual funds can provide an excellent vehicle for investing for your child's education as they offer diversification, flexibility, tax efficiency, variety and simplicity. Remember, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your child's education.

Depending upon when you begin investing for your child, here are some model portfolios:

1. Age of the child: newborn to 5 years- If you start investing at this stage, you allow your savings the maximum time to build up assets for your child's education. With time on your side, you can take higher risk and go for equity funds. However, if you choose to invest on a regular basis, try and increase the amount every year.

2. Age of the child: 6-12 years- While a part of the portfolio may still focus on aggressive investment options like equity funds, it would be prudent to include balanced funds also to reduce risk. As the child grows older, an attempt should be move to money to lesser volatile investment options.

3. Age of the child: 13- 18 years- At this stage, the right strategy would be to invest in funds that are least volatile. In other words, the focus should be on preserving capital. Also, liquidity should be an important consideration while working out the strategy.

As mentioned earlier, for those who wish to take the equity fund route and invest on a regular basis, a Systematic Investment Plan (SIP) is the best. It is a proven fact that a steady plan both in terms of savings and investments, helps pursue financial goals. When you invest a fixed amount, such as Rs 5000 a month, you invest at different levels without having to worry about the markets.

Here are some important things to remember before you establish your regular investment programme:

• Decide how much you want to invest on a regular basis. It is important to choose an amount that you will be comfortable investing regularly over the long term.
• Decide the frequency at which you want to invest-each month or each quarter.
• Continue investing irrespective of whether the market falls or rises.
• Remember the objective for which you are investing throughout the period. This will enable you to remain focused on this very important goal of your life.

For those who may like to opt for a readymade solution, there are established dedicated funds for children. Through these funds, one has an option of investing in a ready made equity-oriented or a debt-oriented fund. Here is a glimpse of what these funds have offered to investors over a period of time.

Equity Oriented Hybrid Speciality Funds

Fund	Returns (in %) - as on Nov 11, 2011
	1 yr	2yr	3yr	5 yr
HDFC Childrens Gift-Inv	0.1	17.4	29.9	11.8
Prudential ICICI Childcare-Gift	-17.1	7.6	24.5	6.3
Tata Young Citizens Fund	-3	4	16.5	6.8

 

 

 

 

 

 

 

Debt Oriented Hybrid Speciality Funds

Fund	Returns (in %) - as on Nov 11, 2011
	1 yr	2yr	3yr	5 yr
HDFC Children's Gift-Sav	6.2	10.3	14.9	9.5
SBI Magnum Childrens Benefit Plan	2.1	7.6	9.9	6.7
ICICI Pru Child Care Plan - Study Plan	1.6	8.9	13.3	9.3

 

 

 

 

 

 

* Returns over 1 year are Annualised

(Past performance is no guarantee of future performance)

So, go ahead and start planning for your child today. Make mutual funds an integral part of your strategy and get the best for your child.

Hemant Rustogi

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com