Planning for your child’s future has two aspects: the financial and the emotional. Decisions taken on one side have an impact on the other. If you can control the emotional aspects, taking care of the financial aspects may be relatively simple.
Just like young investors have age on their side when it comes to long-term equity investment, parents have an early mover advantage when it comes to planning for their children’s future.
The good news is that more and more parents are now realizing the importance of starting early. “Even young couples who are still planning to have children, are investing these days. They know they will have an edge as they will invest less and for longer. They can remain invested in equity instruments for the long term,” says Melvin Joseph, managing partner, Finvin Financial Planners.
We all want the best for our children but our way of doing that differs. There is no one right answer, but there are a few guidelines that can be followed to build an overall structure to plan finances.
What Are Your Goals?
Parents have many responsibilities; financial planning for their child is just one of them. Most of the goals are non-negotiable, so it is important to prioritize. Ask yourself what you are investing for. Education (till what level)? Marriage? Capital to start a business or buy a house? What if your child wants to pursue a talent such as in sports or art?
“Parents have started planning for their children’s higher education and marriage goals, which was not the case before. Earlier, parents used to manage these expenses either from annual earnings or from their retirement corpus such as PF,” says Joseph.
For 43-year-old Pranjal Kumar, co-founder of a Noida-based ITES firm, saving for education is the top priority. “I want to send both my children abroad, for their Bachelors and Masters and more if they want,” says Kumar, whose children are 10 and five-and-a-half years old now. “Marriage and a place to live (preferably in Delhi-NCR) are our other priorities for them,” he adds.
Apart from planning for the usual goals of education and marriage, focus on other aspects as well, as new opportunities arise. “If possible, I would like to invest towards building a seed fund for entrepreneurship if they are so inclined, or for an alternate profession,” says Kumar.
While setting the goals, remember to fix a time frame. If the education goal is, say, 10-15 years away, parents can choose a long-term instrument that is equity-based. If the goal is only a few years away, a mixed or debt-heavy portfolio may be more apt.
How Much To Invest?
Once you have decided what you want to invest for, it’s important to estimate the cost of each goal. For instance, if you are saving for your children’s education, calculate based on the future cost and not the cost at present. “Education inflation can be a real spoilsport. By some calculations, this is 10-12 per cent every year. Even in primary schools, the cost of education can increase 12 per cent every year. If you fall short at any of these levels that you had planned for, it will be very painful,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of financial planning firm Merrymind.in.
A simple way to figure out the probable cost of education is to use one of the many online calculators. For example, a course that costs Rs 10 lakh today will cost about Rs 55 lakh in 15 years, assuming education inflation at 12 per cent.
Once you have the time frame and have found the amount needed, you can work backwards to calculate how much amount you need to invest in, say, a mutual fund systematic investment plan (SIP).
“People often forget to consider inflation in education. In our sessions, when we show what effect this can have, they are shocked. The sooner parents realise the effect of inflation, the better it is,” says Mrin Agarwal, financial coach and founder-director at investment advisory firm Finsafe.
Knowing what the future cost is especially important for those who want to send their children abroad. “Many people who want to send their children abroad are planning their finances early on. They want to understand their risk appetite, how to make investments abroad and the impact of currency fluctuations,” says Sen.
Being ahead of the game also protects parents from a last-minute scramble for funds. For example, both parents having to work by force, taking on a loan, having to sell an asset urgently or dipping into the retirement kitty or emergency funds.
Planning ahead can also help you explore other options and working with children can help cover the distance. “I see many parents being realistic now. They explain to their children that it may not be possible to be fully self-financed in education, so a part of the funds may come from an education loan, which the children will help repay,” says Sen.
Where Should You Invest?
This is a tough one to answer. A lot of us invest only in instruments that we find safe, without understanding the risk-return factor.
“We are very conservative in our financial decisions,” say Bengaluru-based Arun Premlal, 41, who works in an Indian MNC, and his wife Minu K, 35, who works in an NGO. “As of now, I save in a savings account for our four-year-old son Nihal. But soon, I will study instruments like mutual funds and see what needs to be done,” says Premlal.
Mumbai-based Bharath Kumar, 40, and Shrutha Jain, 38, have chosen a mix of instruments for their nine-year-old son Hridhaan’s future. “We have fixed deposit, Public Provident Fund and mutual fund SIPs for our future plans,” says Jain.
The choice of products should depend on factors such as the time available, investible amount, corpus required and risk appetite. Savings accounts, for example, have low returns and for a person in the highest tax bracket, the real returns may be negative post inflation and taxes.
“I invest in property for my kids’ education needs. I follow a set of fundamentals to make my choice. I also invest in Sukanya Samriddhi Yojana for my daughter,” says Kumar. His wife, Surbhi Gupta, a 40-year-old corporate lawyer and partner in law firm Antares Legal, has an emotional attachment to gold and buys the metal to invest for their children’s marriages.
Though there are many products available in the market, not all are suitable for all types of goals. Moreover, a child’s future carries emotional weight, which can be exploited. “In children’s policies, insurers waive the premium in case of the demise of the policyholder. This is the biggest emotional catch, and should be avoided. Such policies are not flexible and offer low returns,” says Joseph.
Connecting objectives to investments, and investments to returns is important but so is understanding your own risk appetite. “People often choose the wrong products. They can be too conservative or too aggressive,” says Agarwal.
While focusing on the right investments, don’t forget the importance of life and health insurance, a continuous need. In the current scenario, it is necessary to have health insurance cover of “at least Rs 25-30 lakh, which can be a mix of base and super top-up policies,” says Joseph. Assess your need for adequate and personal (not just corporate) health and life covers, because an unfortunate event in either or both of these cases can play havoc with your children’s future.
If the decisions are too difficult to take, seek expert advice. Doing so will help you understand what you need, even if it means separating the emotional from the practical.
***
The All-Essential Need-To-Do List
Step 1
- Prioritise your financial goals
- Understand that goals like retirement planning and insurance are as important as those for the children
- If time or money or both are short, be ready to choose between goals
- Keep an eye on the need for adequate insurance
Step 2
- Start as early as possible
- Figure out the corpus needed
- Keep inflation, especially in education and healthcare, in mind
- Use online calculators to get started
- Informed decisions are better than those made in a panic or with incomplete understanding
Step 3
- Choose products wisely. For example, insurance plans often give low returns and real estate may be illiquid
- Assess your risk appetite and financial needs and then choose the investment avenue
- Seek help if needed
kaveri@outlookindia.com
