Making Your Kids Realize Their Dreams
Written on Wednesday, May 13, 2015
By Team Bajaj Capital
All that you need to know as to where and how much to invest for your children needs
You do all that it takes to be a good parent. You take your family and kids to dinner, you spend time with family on weekends, you buy gifts for kids and even the latest gadgets to keep them happy. After all, one earns for the family, isn't? But then, are you merely looking to make their present perfect or are you concerned about their future too? Schooling and then higher studies will play an important role in the way children shape their future life. Time flies and soon kids will be in college and then higher studies. Are you prepared to meet the cost of education few years down the lane?
EducationCosts are rising and Rising Faster
The cost of education is rising. Unlike general inflation, which seems to be coming down, cost of education, according to some estimates is rising at about 10-12 percent an annum. Even by conservative estimate, if education cost inflation of 6 percent a year is considered, then an engineering course that costs Rs 6 lakh presently will cost around Rs15 lakh after 16 years. Similarly, MBA course that costs around Rs 10 lakh would cost around Rs 34 lakh after 21 years. Children's marriage costing Rs 15 lakh at today's cost would make you shell out nearly Rs 35 lakh after15 years. Unless you prepare to meet the cost of higher education, making it at the last stage could be difficult to handle. Also, the kind of courses and education streams few years from now could be very different from what we have now. The new ones would in all likelihood be more expensive and your children might be hooked on to them. Prepare now to make them realize their dreams.
Findout how much you need
If undecided on the course and if your kids are still small, consider 2-3 different courses and estimate their outflow at today's cost. Then, inflate it at a conservative inflation rate of about 6 percent per annum for number of years after which kids would need them. The resultant figure is the future value of your current need and this is what you need to save. Doing this calculations helps in saving the right amount, no more no less.
Findout how much you need to invest monthly
Once you have arrived at the final cost, find out how much you need to save every month Towards it. Assuming a growth rate of 12 per cent, you need Education Costing Rs 6 lakh Today Will Be Rs 15 lakh in 16 years 39 May 2015 | Investors India to put aside around 2,600 per month
for the engineering course after 16 years, while it will be about Rs 3,100 per month for MBA after 21 years.
(See"SIP: For Your Child Future")
Create a separate investing process for your child's needs. If there are more than one kid, earmark separate funds for each of them. In a way, you are creating separate portfolio for each child's specific need such as education and marriage. Tracking them becomes easier thus helping you reach your goals more efficiently.
Choose the right asset class
Choice of the right asset class is very important especially when the goal is a long term. A small difference in return can result in a big difference in the final corpus. 2 percent difference in returns generated over 25-years may show a 40-percent difference in maturity amount (See Route to golden years, February 2015). Several studies in the past have shown that equity has delivered high inflation-adjusted return compared to other assets over the long term.
Where to invest for child needs
When it comes to investing for child needs, there can be several different investment avenues. It is important that investments are spread across and not confined to a specific asset oriented open ended mutual funds schemes and start SIP in them. Go for consistently performing funds that have delivered high returns over different time periods. Within this, 1-2 can be a mid-cap scheme and others can be large-cap schemes. One can also invest through ELSS funds and keep rolling over the maturity proceeds. This helps in saving taxes and also keeps the goals linked to your investment. Keep reviewing non-elss schemes every two years and take necessary action. Step-by Step to Kid's Goal through SIP you need to systematically save towards your goal which is commonly termed as SIP in or product. Other more common and ideal investment avenues could be through equity-oriented mutual funds and insurance plans. Child needs are a long term goal hence making use of the potential of equities best serves the purpose. Be invested in equity oriented schemes either from mutual funds or insurance plans. In MF's, choose equity oriented open ended mutual funds schemes. However, what is important this the right choice of mutual fund schemes and the right kind of insurance plans. Unless this is in place, the purpose of saving for child needs could derail.
Mutual Funds portfolio for kids needs
Build a separate portfolio for child's specific needs and earmark savings towards it. Choose 3-5 equity oriented open ended mutual funds schemes and start SIP in them. Go for consistently performing funds that have delivered high returns over different time periods. Within this, 1-2 can be a mid-cap scheme and others can be large-cap schemes. One can also invest through ELSS funds and keep rolling over the maturity proceeds. This helps in saving taxes and also keeps the goals linked to your investment. Keep reviewing non-elss schemes every two years and take necessary action.