Financial Planning for Your Little One - Things You Must Consider

In these times of rising expenses, education is a costly affair. Hence, every parent thinks of saving for their child’s future education expenses. Here are some things to keep in mind while doing financial planning. Many parents invest in child plans sold by mutual funds and insurance companies. They assume that since a separate category of product is available, they are the best option. But ‘Child Plan’ is actually a marketing term, not a financial one. While these plans do provide some safety and insurance, they do not offer the best returns. The inbuilt expenses in these plans are high, and when you deduct these expenses, the returns are reduced. Hence, clubbing insurance and returns into one product is not the best thing to do. 

Term Insurance: The first thing to do is to get a term insurance plan for yourself. This will ensure the income you earn is available to your family, even if you are not around. 

The next step would be to estimate the money that you will need for various expenses, and when you will need it. Bucket your needs into long term, medium-term and short term needs.  

Then, simply look at investments which will help you build a corpus to meet your goal. There is no need to focus on a child plan. Any investment plan that meets your need is good enough. 

Meeting Long Term Goals: Primarily required to plan for your child’s higher education and marriage. The following 2 objectives must be met:

1. The returns should be high in the long term and beat the effect of inflation and

2. Enforce discipline in you. So, typically does not allow you to dip into the pool for any immediate need. 

Some options you can look out for:

1. Public Provident Fund: This is one of the best and safest ways of investment. It has a 15-year lock-in which allows you a good time to build a fund for your child’s education. The interest earned is tax-free and you get a rebate under Section 80C of the Income Tax Act. All in all, this one is a tax-efficient, long term and safe way to invest. 

2. Sukanya Samriddhi Account: An excellent option, if you have a girl child. Tax benefit is offered under Section 80C of the Income Tax Act. 

3. Gold: Gold has generated much better returns than most asset classes in the long term. So, if you are looking at a holding period of 10-15 years, gold can give you good returns. I would advise not to purchase the gold in physical form as this would involve locker and storage charges. Go for gold ETFs. Investing in electronic form also removes the threat of theft. Gold ETFs allow the option of investing small amounts every month to help you build a sizeable chunk. The only disadvantage is that on selling the investment, one has to pay capital gains tax. Gold has always outperformed over longer tenures, hence this is a good investment option. 

4. Mutual Funds: These are divided into two categories:

1. 1. Equity Mutual Funds: These are slightly more risky as compared to FDs and debts funds. Also, it is impossible to predict how the markets would be when you are ready to redeem these deposits. However, equity funds have surpassed returns from bank deposits and given good returns. If you are a long term investor, equity funds are a good option to generate high returns. 

   2. Debt Funds: give better returns in the long term. Funds which primarily invest in AAA securities are pretty much safe. The gilt-edged fund invests primarily in government securities and hence a safe bet. 

Meeting Short Term Goals: 

Apart from the larger goals of building a corpus for education, a parent is faced with many short term expenses as well. Instead of trying to break an investment or take a personal loan, I would advise you to plan for it well in advance. For example, Smita has started saving Rs. 5,000 every month because she would like to build a stash of Rs. 50,000 for her son’s first birthday. Invest in a less volatile liquid fund or ultra short term fund or recurring deposit or FD. If your goal is 3 – 4 years ahead, invest in a debt fund. Good quality bank deposits and Company deposits with a good rating are also a good option. Most FDs are for 5 years or less. 

Investing in financial instruments for your child’s future is one aspect of financial planning. The other aspect, and most often neglected one is what we teach our kids about how money works. Most children have no idea about how finances work. How money flows in a society, what are earnings, savings and investments? How does a bank function? How does money in a bank grow while the value of the latest gadget decreases? It is up to parents to educate their child about these aspects. When children are aware of what the spending is doing in the long term, they are likely to have lesser demands of their parents. This will go a long way in spending consciously, making it easier for parents to focus on fruitful expenditure.

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