Think of planning for your child’s milestones as a high-stakes game of chess. Each move - whether setting aside savings or choosing an investment - requires foresight, timing and strategy. Just as chess players anticipate several moves ahead to avoid checkmates, financial planning demands a proactive approach, considering inflation, market shifts and future education costs.
With the cost of education rising at a rate far higher than standard inflation, the goal of sending your child to a reputable institution becomes not just a distant thought but a financial reality that needs precise planning and sound strategy. Similarly, you might have other aspirations for your child for which you need to start planning today. The goal here is not to win in the short term but to position yourself for the ultimate endgame—ensuring your child’s dreams are secure, whatever the economy throws your way.
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Why start financial planning early
Starting early is the golden rule for any financial goal but for parents planning for their child’s future, it is essential. The power of compounding—earning returns on both the principal and accumulated interest over time—multiplies with each additional year. Beginning the journey in your child's early years allows you to tackle rising costs without significantly compromising your lifestyle. Industry estimates suggest that education inflation in India was around 11-12 percent over the last decade vis-à-vis six percent of Consumer Price Inflation (CPI) during the same period. And if you are aiming to send your child abroad for studies, accounting for not just inflation but also currency depreciation is crucial, given that the rupee typically depreciates by around 4-5 percent per year, which adds to the cost.
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Building a sustainable corpus
Financial planning for your child’s future entails more than just setting aside funds—it requires selecting investment avenues that can yield inflation-beating returns. Mutual funds, especially goal-based systematic investment plans (SIPs) in equity-oriented schemes, offer an effective path to achieving such returns.
A goal-based SIP is a highly efficient way to counter education inflation and you can start the process by setting clear targets, estimating future costs and selecting funds that align with these aims. Large balanced funds, which combine equity and debt, are particularly suited for long-term goals. Automating SIP contributions ensures consistent saving, allowing your corpus to grow systematically while shielding you from market volatility. Starting early not only reduces the monthly investment needed but also eases the overall financial strain.
For timeframes extending over a decade, equities must become an essential part of your investment strategy. Equity funds are designed for long-term goals and aim to deliver growth over time. Equities, though volatile in the short term, typically outperform other asset classes over the long haul, making them suitable for a 10-15-year horizon. If you are new to investing, consider starting with an aggressive hybrid fund, which combines equity and debt to reduce volatility. You may consider transitioning to options such as flexi or multi-cap funds, aligning with your comfort level and familiarity with market trends.
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Exploring alternative investments
Alternative investment funds (AIFs) have experienced robust growth, with many well-heeled investors banking on this asset class to plan long-term goals like a child’s education, marriage and emergency needs. By the end of FY24, the AIF industry’s assets under management had surged by 36 percent on-year to reach Rs 11.35 lakh crore as per Securities and Exchange Board of India (SEBI) data, a testament to increasing investor interest. Within this, Category II AIFs—housing private equity, real estate and debt funds—witnessed substantial growth, climbing by 32 percent to Rs 9.12 lakh crore.
These funds can offer tailored strategies that provide access to unlisted assets and private debt funds, thus ensuring diversification and potentially generating quarterly income. Additionally, AIFs also provide access to private investment opportunities that come with a longer lock-in but also offer the potential for exponential returns. Accordingly, AIFs offer a differentiated, potentially high-return path that can help parents build a substantial corpus to meet the myriad needs of your child as she hits her multiple milestones.
However, while exploring investment avenues and asset classes, you ought to consider various risk factors to support your child’s financial journey. While asset classes experience market fluctuations, a long-term perspective and a well-diversified portfolio can help mitigate these risks. Additionally, liquidity considerations are important as some AIFs come with extended lock-in periods.
Preparing for your child’s future is a journey best begun early. Make each investment decision with a clear objective, monitor your progress regularly and adjust strategies as needed. With a proactive approach, you will not only secure your child’s major milestones but also instil a legacy of financial foresight and responsibility.
Disclaimer: Securities investments are subject to market risk. Past performance may or may not be sustained in future.
The author is the CEO of 360 ONE Asset.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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