How to secure your child's financial future?

While panning for your child’s financial future, ‘Better today than tomorrow’ should be your theme.

Aug 29, 2019 10:08 IST India Infoline News Service

Child-Future
If your child has big ambitions then the first thing you need to think about is a child plan or more specifically a child education plan.  A plan for your child’s future is not just about “how to secure your child’s financial future” but also ensuring that it gels with your financial goals. For example, your child education plan has to gel with your own retirement plan and synchronize with your retirement planning steps.
 
Let us look at 6 things you must focus on in planning for your child’s future.
 
Overestimate costs and underestimate returns
Being conservative is actually an advantage as you are leaving very little to chance. The amount of money you spent on your entire education 30 years back is what you will now spend in a couple of years of higher education. Any professional course in India can set you back by Rs30-40 lakhs. If you are planning a foreign education, it could cost well over Rs1cr. Plain inflation indexing has not worked, so focus on education cost inflation. To be on the safer side, don’t assume fantastic returns on your investments.
 
Equities must be your plan focus
When you are planning for your child’s education after 15 years, you have time on hand to leverage the power of equities. Over time horizons of more than 10 years, equity funds have worked best in terms of risk-adjusted returns. In fact, for such long term goals, equities are a must because that is the risk you can afford to take. The bigger risk in a child’s plan is not taking adequate risk.
 
Start early and adopt a SIP approach
However small, start your SIP for education planning today.  Apart from giving you the benefit of Rupee Cost Averaging (RCA), SIP also synchronizes investment allocations with your inflows. Here is the impact of starting to plan for your child’s secure future early!
 
Planning for your child’s education corpus of Rs.1 crore in 2034
SIP Starts in 2019 2021 2023 2025 2027
SIP on Equity Funds Equity Funds Equity Funds Equity Funds Equity Funds
Target in 2033 Rs.1 crore Rs.1 crore Rs.1 crore Rs.1 crore Rs.1 crore
Tenure 15 years 13 years 11 years 9 years 7 years
Annual Yield 15% 15% 15% 15% 15%
Monthly SIP Rs.16,224/- Rs.22,472/- Rs.31,703/- Rs.45,988/- Rs.69,754/-

The more you delay the start of your SIP, the more you must contribute to achieve the same target. Better today than tomorrow should be your theme.
 
Shift to liquidity well before milestones
Child’s future planning requires milestone payment at regular intervals. Your plan must be robust enough to make liquidity available when it is needed. Plan your milestones properly and shift to liquid funds well in advance. Don’t keep too much price risk in the plan around the milestone periods. That is a common mistake that most people tend to commit. This will ensure that liquidity is available when required without any price impact risk.
 
Don’t forget to build insurance into your child’s future
It may sound cynical to think about what happens to the plan in your absence, but pragmatism is all about planning for the unknown. How will you ensure that the child’s plan remains unaffected in an exigency? MFs offer specialized child education plans that combine investments and insurance. In the event of the death of the sponsor, the child plan continues without further contribution. You can also use term plans, but the moral of the story is that insurance is imperative.
 
Monitor the plan and benchmark with alternatives
The child plan must be monitored vis-à-vis goals and milestones, at least, on an annual basis. Based on your monitoring, you need to take a call on rebalancing the child’s education plan to make it more in sync with market reality. What are the alternatives to the plan? There are education loans available, but they are not too favourable and rates are too high. It is better to use the equity mutual fund SIP route to plan for your child’s future. Of course, ensure to embed insurance into the plan!

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