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Can "child plans" help you plan your child's future? - Outside View by PersonalFN

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Can "child plans" help you plan your child's future?
Jan 31, 2015

All parents are concerned about their children's future and well-being. But not all of them take the necessary steps to make sure that their little one has a stable and bright future. Hence, we would first like to congratulate you for reading this article as you are not only concerned about your child but also wish to take important steps in the right direction. Many of you may have a question, "When should I start planning for my child's future?" Let PersonalFN tell you that there is no "right age" to start planning for your child's future. Irrespective of how old your child is, the right time is now.

Now, that you know this, the next question popping in your mind must be how you should go about planning your child's future. The vast variety of investment products available in the market today might confuse you as to which of them is the best for your child's well-being. Many mutual fund houses have launched special schemes, which are said to be designed specially to fulfill your child's financial goals. While some of these schemes might have a higher exposure to debt to reduce the risk exposure of the portfolio especially for investors whose financial goals are near to maturation, others might focus more on equity investments to provide growth for their investors whose goals are far from maturity. Some of these schemes also come with a high exit load to discourage parents from early redemption.

Now for the important question - Should you invest in such "child plans" to meet your child's financial goals?

PersonalFN is of the view that one should not get carried away by the name of any investment product. Rather, you must analyse the product in detail and then decide whether it suits your investment objective and time horizon and if it has the potential to fulfill your financial goals. If you choose prudently, even plain diversified equity oriented funds are capable of generating adequate returns, which are required to achieve your children's long term objectives. Investors with a moderate risk appetite, who are not comfortable with the risk that comes with a diversified equity oriented fund, can opt for balanced equity oriented funds. However, remember that any blindly selected fund cannot help you meet your child's objectives. It is imperative to select winning mutual funds to achieve your little one's goals.

Also, some insurance companies offer plans which they claim not only would cover your child's expenses (such as education, marriage and so on) but also provide an insurance cover if something unfortunate was to happen to the parents. Looking at these multiple benefits that some insurance plans provide, you might be enticed to buy such a policy. Should you buy them? This is subjective in nature. Many of these policies are nothing but, Unit Linked Insurance Plans (ULIPs) or Endowments Plans. It is possible that, the returns generated by these policies may not be sufficient to meet your child's goals and the insurance cover that they offer might also be inadequate. PersonalFN is of the view that investments and insurance must be kept separate. To meet your insurance needs, it is prudent to opt for an adequate term policy.

How should you plan your child's future?

  • Determine your child's financial goals (such as studies including graduation and post-graduation, marriage and so on). While planning, remember to include even small expenses. Forecast the cost of all expenses, keeping in mind inflation and other factors

  • Chalk out a suitable asset allocation pattern based on your risk appetite and risk tolerance level

  • Calculate the amount that is required to be invested per month to meet your child's objectives (keeping in mind the rate of return offered on different asset classes and investment products)

  • Don't forget to take adequate insurance coverage (through a term policy) which can meet your child's expenses after your unfortunate demise

  • Make sure that you never dip into the funds saved for your other priorities (such as contingency reserves, retirement etc.) to meet your child's goals. Also, never break the investments done for your child to meet other less important priorities (such as buying a car, going for a holiday and so on)

  • Remember to revisit your asset allocation pattern as you near the financial goals. Also, review your portfolio from time to time to make sure it is in line to meet your child's objectives and to incorporate any changes that might have occurred
PersonalFN is of the view that you should not depend on the name of any investment product to meet your child's financial goals. Don't let the marketing gimmicks of any sales person lure you into investing in any product without analysing it completely. Instead draw a financial plan and stick to it. If you feel that you don't have the time or expertise to carry out all the steps of financial planning by yourself, don't hesitate to take the help of an unbiased and experienced financial planner.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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