How To Invest for Childrens Future | Best and Efficient Financial Plan for Childs Future | ETMONEY

Parents want their children to be happy, healthy and to be successful. What connects these desires in a direct or incidental way is ofcourse money. And this video is all about the planning that path which can help achievement the many goals you have planned for your child.

Parents have a consistent set of desires they want their children to be happy they want them to be healthy to be successful and for them to experience the good things in life what connects these desires in an indirect or a direct way is of course money and this video is all about helping you achieve the many goals that you’ve planned for your children in all

Honesty planning for your child’s financial future is not very different from how one would deal with any other long-term goal like buying a house or planning for one’s retirement and here’s how this process would go step one is to identify the goals higher education recurring education a school trip a high-end motorcycle marriage inheritance etc step two is to

Prioritize the goals in terms of time and importance so that one can tackle the right goals at the right time and then we have step three where we shall look to arrive at future expense estimates as a combination of current costs and inflation to elaborate this further let’s say you want to be financially prepared to support your daughter’s education at a top b

School once she graduates from college in the year 2030. now the current phase in 2021 for a two year mba program at iim ahmedabad is rupees 23 lakhs now this fees has been historically rising by 12 on an annual basis over the last two decades and by extrapolation the same education that cost 23 lakhs today would come at a substantially higher 64 lakh rupees in

The same manner this step requires for the parent to map out all present and future expenditures for every visible goal so that one can have a clear picture on when what and how much will be required to give the child a contended financial future now before we continue it’s important to realize that financial planning has two parts to it the mathematical part with

All those tables and calculations that we just did and then there is the behavioral part which is often where the biggest money mistakes are made in fact we have a video on the most common mistakes by investors so if you haven’t watched that then this one comes highly recommended but to keep it simple here are four best practices that one can put to good use when

Managing money for your children firstly ensure that your goals are realistic and don’t forget to pin them down second always stick to a plan thirdly don’t be swayed by short-term news and noise and finally do realize that most agents and distributors would put their own interest above yours so the more you can educate yourself the more wealth you can generate

I personally feel this last point is very important in the context of planning for a children’s financial future and the next section on where one should invest would explain exactly what i mean by that now every parent wants the best for his or her child which means choosing the right investments is not just an analytical exercise but is also an emotional one

And with these emotions come highly marketable options child policies offered by life insurance companies child mutual funds created by fund houses sukhanya samridhiyojna college plans by wealth management firms gold savings plans by leading jewelers etc etc however the hard truth is that none of the investment avenues are specifically designed for children i

Mean there might be a feature here and there but the highlight of these offerings is the way in which these products are marketed to appeal to a parent’s emotional fragility let’s take child plants for example these are plans offered by life insurance companies and this is exactly the product that your neighborhood insurance agent or your banker might pitch to

You now a child plan is pretty much an endowment or a ulip plan but it does have one unique benefit which is that this plan does not terminate upon the death of the insured parent so what happens in a child plan is that the insurance company takes on the payment of premium upon the death of the parent and starts investing to the child’s fund thereby ensuring

Continuity of the goals that were originally planned by the parent i am sure you can now appreciate the marketability of this product as it combines emotions and savings and it might be an acceptable product for anyone who doesn’t understand long-term investing however since the time frame between now and the targeted goal is on the higher side in our opinion

A combination of mutual funds and a term insurance plan can do a much better job by not just earning more returns but also by providing a higher life insurance cover in fact speaking of mutual funds some fund houses like access hdfc sbi and others do market schemes that are labeled as child mutual funds in all fairness these children specific mutual fund schemes

Are nothing but aggressive or balanced hybrid funds that come with a lock in period a high expense ratio and often generate average category performance nevertheless the category has garnered over 10 000 crores in am which is not a lot but still establishes the emotional connect that the product has with a child’s future wellness in our opinion there are a couple

Of alternatives to consider here firstly a lot more can be done by investing in schemes within the broader hybrid funds category rather than the small universe of child specific funds and if the selection of the right funds is a mystery then do access the etimony report card and racking feature on a platform that will do most of the work for you a second point

To consider is that parents can look to be a little more aggressive for the longer goals that are 10 12 or 15 years in the future by allocating the entire investments to equities of course one would have to brace for a volatile ride but doing that also raises the scope of achieving superior returns which means more financial support for your children all right

Next let’s talk about inflation and more importantly let’s talk about the many fixed income instruments that often come as the default choice for parents when building a financial corpus these include products like a fixed deposit a ppf account or investing in the sukanya summary the yojna or national savings certificate etc the charm of using these avenues is

Most certainly the safety that these schemes offer and the perceived notion of its stability now use this phrase perceived notion of stability because of two reasons the first reason is that interest rates in these products are not fixed and are subject to change every quarter as one can see in the adjoining table unfortunately many investors are not aware

Of that and hence make their own perceptions and the second argument i have to this is that for any product that is long term in nature where the path to returns is a stable smooth line or is a volatile one becomes somewhat of a non-issue in fact in our opinion what one should certainly consider is how efficiently can these instruments beat inflation because

If they don’t then every additional year that one stays invested in these products only brings down the real value of the money as a matter of fact we think this is a more serious problem when it comes for planning a child’s future finances and here’s why you see the biggest use case here is a child’s education and while the general consumer inflation has been

Growing at six percent the education inflation has been growing by a factor of two and somewhat around 12 percent on an annual basis what this means is that parents who have been using a sukanya samridhi or a fixed deposit for accumulating an education fund are losing about six percent every year in real terms which is certainly a cause of concern and something

That parents should try to rectify by choosing their investment vehicles wisely now in addition to financial products many parents also invest in physical assets more specifically they invest in real estate or gold to support their children’s future finances while these are personal choices anyone who has bought and sold property will agree that the registering

Renting and maintaining of property is hard work and that sometimes it takes years to dispose of a property when it comes to gold the traditional approach was and continues to be the buying of jewelry or gold coins which are then kept at home or in a bank locker well this type of gold does not earn any form of dividend or interest nevertheless indians do like

Investing in gold as it has a symbolic connection with auspicious events like a marriage so let’s put this all together we discussed insurance blended child plans which in our opinion does offer something unique but that’s not a lot and there are better alternatives to this we also looked at child specific mutual funds and suggests that investors look at the

Wider spectrum of hybrid and equity funds which are more equipped to beat inflation and specifically the education inflation with regards to fixed income products these are useful especially for shorter duration goals but definitely not if the runway extends to 10 years or more real estate seems to have more concerns than advantages in our opinion and gold with

Its ability to retain value does seem to have a role to play in one’s portfolio as it offers a hedge against inflation and is weakly correlated to equities in fact creating a portfolio of diverse asset classes is probably the right way to describe what a parents need to do and in that context having a combination of equity mutual funds short-term debt funds a

Sukanya samriddhi a bit of gold and most definitely a term insurance will not only improve the risk adjusted returns in the portfolio but will also ensure that there is enough liquidity and tax efficiency to work with now on the etimony youtube channel we have covered many of these topics in a series of data rich and insightful videos but if you want a refresher

Then do access the relevant links in the description of this video no single investment avenue can take care of a child’s every financial need and for that reason it is important to segregate into short-term and long-term goals in addition to improving your cash flow planning efforts breaking your goals by tenure also clears your mind in determining which

Type of asset class is likely to work best in which case to put it briefly use your savings account fixed deposits liquid and short-term debt funds for more immediate goals and utilize a mix of equity funds gold and sukhanya-samridhi type fixed income instruments for the longer goals specific to mutual funds the systematic investment plan approach to investing

Continues to be the most disciplined and progressive way of accumulating wealth sips don’t need a big outlay and one can start from as little as 500 rupees a month and it is this series of small and automatic accumulations that makes it one of the most popular investing technique worldwide in fact here’s a quick reference table that one can use to set up their

Moderate to long-term financial goals we have done these calculations at a cagr of 12 which is a fairly representative assumption of the returns one can expect to make from the stock markets and if you do want to try out some combinations then do check out the sip calculator on the eti money website whose link we have attached in the description of this video now

One of the joys of what we do at et money is to interact with many investors over email phone in person and over social media and in one of these interactions we learned of a family where the parents grandparents uncles aunts all contribute a little amount of money every month towards an education fund for all the children within the family so a thousand rupees

A month from the parents another thousand from an nri uncle a 300 rupee sip from the grandmother and so on and this bit by bit accumulation swells up to a family-sized corpus which is how one of our investors got his education this technique is not new and is a widely used approach in the united states where a five to nine plan is set up in a child’s name which

Creates an easy way for friends and family to contribute some money towards a child’s college education we don’t have something similar in india yet but given the state of education inflation we won’t be surprised if a tax efficient higher education savings fund comes up within this decade for our country until then talk to your family members and figure out if

A collective effort can be made by all elders in the family to fund the higher education of all the children within your family lastly the planning for a child’s financial education might also require you to look at some better trade-offs or choices for instance instead of buying physical gold which gives no interest what if instead you buy an income generating

Asset like a small shop the shop would have the potential to appreciate in value will continue to give monthly rent and is still likely to have good symbolic value similarly there might be a trade-off scenario where financing a foreign mba with an education loan which comes at seven or eight percent might make better economics than liquidating your mutual funds

Which might be paused to make 13 to 14 percent so these are just some trade-off examples and i’m sure there are many more so do keep an eye and ears open when planning for your child’s financial welfare and with this we come to the end of this presentation the focus of this video was on giving users a better understanding of the planning process more specifics

On how to invest how to allocate how to review your portfolio are already available in the many videos that we have hosted on the et money youtube channel so do have a look at those once again thank you for your time don’t forget to subscribe share and like this video and i look forward to catching up with you next week with another insightful video until then

Mutual fund investments are subject to market risks read all scheme related documents carefully

Transcribed from video
How To Invest for Children’s Future | Best and Efficient Financial Plan for Child’s Future | ETMONEY By ET Money