Create Financial Cushion For Your Child

Saving for specific life goals is at the heart of all investment decisions that we make. Among the many important milestones in life, the college and higher education admission of children remains the most critical for investors. Securing entry into reputed colleges in India or even abroad is a great starting point for kids to launch their careers. But as with all good things in life, higher education costs a lot of money and it is necessary to start saving judiciously for the goal early enough. [EasyDNNnews:PaidContentStart]

Also, a recent study by BankBazaar indicates that higher education fees inflation in India is twice the regular long-term consumer inflation. So, a 11-12 per cent annual inflation in college tuition fees is to be expected. Subject, of course, to changing societal and personal preferences, marriage is another goal for which expenses can be heavy. Therefore, specific goal-based investing roadmaps become necessary for reaching these financial targets. And the ideal way to go about the task is to invest in mutual funds over the years via the systematic investment plan (SIP) route. 

Steady Path to Goals
To make SIPs in mutual funds work for your child’s goals, it is necessary to follow a few steps systematically so that your targets are reached without too many hiccups. 

Taking Assistance
Before setting off on the investment path, you must take the help of a registered investment adviser (RIA) or a mutual fund distributor (MFD) so that they can guide you constantly till you reach your goals. This aspect is especially important if you do not have the time and/or the expertise to manage your portfolio and to take important decisions for reaching your milestones. 

Deciding the Corpus Required
While it may be hard to guess which course or stream your children would choose for their college education, a broadbased planning can be done. You could research on the fees charged across various disciplines in public and private sector institutions. You should also add other expenses such as hostel fees, living expenses and the like, to the corpus needed over the length of the program. 

Factoring Inflation
As indicated earlier, education inflation is higher than the general rate of price rise in the economy. So, you will need to factor inflation into the final fees/other expenses corpus calculations for arriving at a good estimate. 

Starting Early
This is a very important step. If you start saving for your children’s goals early on, you will have more time for compounding to work for you. For example, for your child’s college education at 18, if you start at age three, you will have 15 years of investments. If marriage is expected at 25, and you start at the same age, you will have 22 years for investing towards your goals. 

Deciding the SIP Amount
This critical step will tell you how much you need to save and invest to reach your child’s goals. By taking the help of an RIA or a MFD, you can decide the corpus required and the monthly investments needed to get there. For example, if you need Rs 1 crore for your child’s higher education 15 years hence, you will need to invest Rs 20,000 every month for the goal, assuming 12 per cent average annual returns. 

Investing in the Right Funds
Depending on your time horizon, risk appetite, investible surplus etc, your RIA or MFD will help you choose a set of funds suited for your goals. Typically, flexi cap and large cap funds are suited for long-term goals. Those with higher risk appetite may want to add mid and small caps as well, particularly if the time horizon is north of 10 years. Hybrid Funds such as balanced advantage, multi-asset allocation, etc. are suitable for the medium term of less than five years. All short-term requirements of three years or less must be met with investments in Debt Funds. For marriage as a goal, gold ETFs can be considered. 

Staying Put and Stepping Up
Investors must stay put across market cycles for the long term till the goal is reached. Periodically, they must also step-up investments if their surplus increases. Regular review of portfolio constituents is also necessary. 

The writer is Director, Silverline WM Pvt Ltd.
■ Email : [email protected]

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