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How To Be Mindful While Planning For Your Child's Future? - Outside View by PersonalFN

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How To Be Mindful While Planning For Your Child's Future?
Apr 23, 2019

The very first time Shantanu held his daughter, Samaira, he instantly envisioned the best life for his little bundle of joy. She was going to grow up with strong wings to soar great heights. He decided to fulfil all her reasonable wishes to keep her happy and secure.

Shantanu decided to start saving and investing for his daughter but was careful about not losing his hard-earned money. In the past, he had been a victim of stock market crashes and/or seen his parents lose money through risky investments.

Hence he invested in traditional investment avenues such as bank fixed deposits, recurring deposits, Sukanya Samriddhi Yojana, Public Provident Fund (PPF), physical gold, etc.

If you ask me, this approach to investing is not going to help him turn his vision into reality. He missed out on considering the rapid inflation. In fact, the cost of education is rising faster than the increments most people earn.

If he wants to send Samaira to Ivy League university abroad for higher studies, he needs to prepare for it by breaking this financial goal into piecemeal investments. Plus, to fulfil his daughter's reasonable demand, he will need a flexible budget.

Shantanu is just one case study, there are several people like him who do save and invest for their child's future, but not in the right manner.

If you are one of them, then what should you do?

Invest intelligently with a proper financial plan!

Proper financial planning will enable you to empower your child with good quality education. This includes setting goals that are specific, measurable, adjustable, realistic and time-bound (SMART) and creating a strategy to achieve them.

Although this seems like a cake walk, it isn't.

You need to evaluate how much money your child's education is going to need by breaking it up into 10 years, 15 years, and 22 years (if planning to do masters from abroad) and perhaps, even for their wedding expenses.

Roughly, the current education inflation is between 10-12 % annually.

Table 1: Impact of Rising Education Inflation in India

Course Engineering Medicine Arts MBA
Current Fees in Rs (2019) 10 lakh 25 lakh 2 lakh 20 lakh
Future Value in Rs (after 5 years) 16.85 lakh 42.12 lakh 3.37 lakh 33.70 lakh
Future Value in Rs (after 10 years) 28.39 lakh 70.98 lakh 5.67 lakh 56.78 lakh
Future Value in Rs (after 15 years) 47.84 lakh 1.19 crore 9.56 lakh 95.69 lakh
Future Value in Rs (after 18 years) 65.43 lakh 1.63 crore 13.09 lakh 1.30 crore
Future Value in Rs (after 22 years) 99.33 lakh 2.48 crore 19.88 lakh 1.99 crore
Amount required to invest per month (in Rs) 8,914 22,285 1,783 17,828
Assumed education inflation rate at 11%
(For illustration purpose only)

And if you will consider wedding expenses of approximately Rs 15 lakh along with the annual inflation assumed at 8%, the cost of a wedding after 25 years will cost you Rs 1.03 crore. For that, you will have to save monthly Rs 9,218.

Once you have the figures, build an investment strategy that will help you achieve the desired corpus. An investment strategy is created based on your current financial circumstances, risk profile, and the right mix of various investment avenues.

[Read: How to evaluate your risk appetite and risk tolerance level?]

Each investment has a risk of loss, but the ones having high risk do provide high returns as well over the long term. So completely ignoring one option because of high risk cannot help you achieve your financial goals.

Thus, you should consider investing in mutual funds. Mutual fund investment offers a diversified strategic portfolio taking cognisance of the investor's financial goals, age, time horizon, and risk tolerance.

A well-defined asset allocation strategy is capable of dealing with different market conditions and helps you reach your goals in a systematic manner.

[Read: Asset Allocation: Hocus-Pocus Or The Essence Of Successful Investing?]

Different asset classes have different attributes. Hence, a mix of all or some is important.

For instance, equity carries the highest risk, but it can help you achieve your long-term goals as it has the potential to generate wealth over an extended period. But at the same time, you can include gold as an asset class which can be a hedge against uncertain times or debt instruments for balancing risk.

As the time horizon of a goal approaches, you may rebalance your investment portfolio gradually towards fixed income or debt as depicted by the table here...

Table 2: Asset Allocation as Per Years to Goal

Time Horizon Equity Fund Debt Fund Gold Fund
More than 10 years 90% 0% 10%
8-10 years 80% 10% 10%
5-8 years 70% 20% 10%
3-5 years 40% 55% 5%
0-3 years 10% 85% 5%
This table is indicative and for illustration purpose only
(Source: PersonalFN)

A well-planned asset allocation acts as a shield to protect the portfolio value during uncertain economic conditions and market volatility.

Remember to keep reviewing your financial plan and keep a track of the growth on your investments. Plus, remember to have two more safety nets, as well-adequate insurance cover and a contingency fund.

One of the biggest potential setbacks to a child's education is the demise of the sole breadwinner in the family and the lack of insurance cover. Hence, it is advisable to have an adequate insurance cover. To know about the optimum insurance you require, try PersonalFN's HLV calculator.

The contingency fund is a fund which helps you deal with unforeseeable events that can occur so that you don't have to dip into your child's education investment funds. Alternatively, this fund can be utilised for expenses you may have missed in case your child wants to pursue a different discipline for masters overseas...

Investing in mutual funds would be beneficial as it ensures diversification that curtails the risk as per your risk profile and can generate better returns if you allocate some portion to equity funds.

Child's future planning is not as easy as it might appear. It goes far beyond just keeping aside money for his/her future. It starts with instilling the habit of saving in your children. When you let your kids understand the worth of money, they themselves start spending wisely from childhood.

This will make them less demanding and help them understand the value of hard-earned money. So, if you wish to give your little bundle of joy the best education and get him/her married off in style, plan for their bright future today in the right way.

PersonalFN believes that it is possible to fulfil the dreams you have envisioned for your children without jeopardising your personal desires with the help of sound financial planning and suitable asset allocation.

If you need assistance in financial planning, reach us on 022-61361200 or e-mail at info@personalfn.com. We will be happy to hear from you.

Till then...

Happy Planning!

PS: If you are looking for funds that carry a Potential to Beat the market by as much as 70%! Subscribe to PersonalFN's 'FundSelect' service.

It is a credible mutual fund research service with a track record of more than 15 years.

Once you subscribe to FundSelect, you will get instant access to potentially the best equity and debt mutual fund to invest and even recommendations on the ones to 'Hold' and 'Sell', along with access to some special reports. Click here to subscribe!

Author: Aditi Murkute

This article first appeared on PersonalFN here

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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