Invest in your child’s future, the secure way

Remember, you have to go through the entire process of financial planning – right from identifying the goal to deciding on the asset allocation plan; reviewing the performance, recasting the portfolio and so on – just as you would do for your retirement planning.

 

 

The answer to this question always is: at the earliest. "This will ensure that one gets a longer time frame to save up for children's education. Hence, it is preferable to start off as soon as the child is born, even if in a small way," says certified financial planner Suresh Sadagopan of Ladder7 Financial Advisories.

 

And if you live in a nuclear family, you need to plan for more than just the educational needs of the child. "For a working couple without adequate support system for child care, the cost of crèche or services of nannies should also be taken into account," says certified financial planner Prerana Salaskar-Apte, partner with The Tipping Point.

 

 

Parents can start planning for their child's future as soon as he/she is born, but things are a bit different for those who have chosen to adopt a baby. While it is heartening to see many Indian families increasingly opening their hearts to adoption, it is equally important to pay attention to the financial planning aspect too – again, the sooner the better. Take the case of Pooja Nair (name changed) who adopted a three-year-old girl recently. Now, she has had the experience of planning for her biological daughter, too, who is slightly younger.

 

"Most parents are prepared financially as far as their biological children are concerned. When we decided to bring home our daughter through adoption, we had not factored in the cost of education. It hit us when we had to pay her school fees. In hindsight, I think we could have planned better for such expenses by making investments," she says.

 

"I feel most parents who adopt get tied up with the legal formalities and the entire procedure consumes so much of energy that very few actually pay a thought to the financial aspect. Even mentally, it is quite an experience as parents adopting a baby is just half the work done – the more important part is the child adopting you. These aspects take up so much your time and effort that the need for financial planning dawns on them much later."

 

Now, Nair and her husband have opened a recurring deposit account for both their daughters.

 

"If a couple is planning adoption, it may be a good idea for them to start off the investments even before they actually adopt one. This way, they will not delay the investment planning process when they get busy with adoption and after," advises Sadagopan. You may also be required to file a list of your financial assets, income-tax returns and salary certificate with the adoption agencies. Thereon, the process would largely be the same for any child and his/her parents.

 

 

While drawing up an investment plan, it is best to map out the corpus a child will require in each stage of his/her life. Also, don't forget to include pre-school costs and extra-curricular activities in the plan.

 

"Over the years, the average age at which a child starts attending school (pre-schools) has come down to two years. Now, pre-schools cost anywhere from Rs 2,000 and Rs 6,000 a month on an average. Once a child turns five, the parents have to choose between SSC (state secondary certificate) that can cost anywhere between Rs 24,000 and Rs 40,000 a year, Indian Certificate of Secondary Education (upwards of Rs 30,000 a year) or International Baccalaureate schools (over Rs 1 lakh a year)," says Salaskar-Apte. "Besides, nowadays, the trend is to enrol preschoolers for interview training classes (costing Rs 10,000 – Rs 20,000) too."

 

Then, of course, there are music and drama classes and vacation camps to be paid for. Another factor to be borne in mind while calculating future costs is the inflation in the education sector. "In upmarket IB schools, the year-on-year inflation has been 15% per annum on an average. So, education inflation of 8-9% can be added to ones calculation," she says. Again, while budgeting for cost of extra-curricular activities, you need to identify say a sport that your child may be inclined towards.

 

Next, you can try to do some research on the cost of training it may entail. "Sometimes, parents assume that it is beyond their means to provide for a particular aspiration of the child. But penning down the costs and actually reviewing your surpluses and existing resources – investments and savings – can throw up surprising results," says Salaskar-Apte.

 

After doing all the legwork on research, the final step is to identify and invest in the instruments that can help you to achieve the goals for your child.

 

"Investments should be made in a manner that ensures appropriate amount is available at the correct time. If the duration is long, equity-oriented assets would be a good idea. When one comes closer to the goal, money should be moved to safer assets to ensure that the corpus is intact and available for the goal," advises Sadagopan.

 

The products you choose will also depend on your risk-taking ability, number of years to the goal and the instrument's return-generating potential.

 

"Ideally speaking, in a financial plan, while we would advise treating child education and rearing as separate goals that could be fulfilled through existing investment resources, we suggest that allocations from current surpluses (earnings) should be invested in safer avenues such as recurring bank fixed deposits or small-saving schemes.

 

This is for education goals up to five years. Post this, equity exposure can be recommended – either go for a superior balanced fund or allocate 60-80% of the outlay to large-cap equity-oriented funds. The balance can be directed to risk-free instruments like FDs," sums up Salaskar-Apte.

 

Lastly, make sure that you keep track of your investment at regular intervals. If you sense a sustained underperformance of a particular investment or a tilt in your asset allocation plan, go back to the drawing table and redraw your plan. If necessary, recast your portfolio. Also, don't wait for the last moment to liquidate your investment in equity.

 

According to experts, you should sell your equity investment at least a year or two before the actual event – in this case, may be the child's college admission – to make sure that the volatility in the market doesn't upset your plans. Make sure that you park the money in a safe avenue like a bank deposit or a debt mutual fund scheme to ensure that you can easily access the money when you need it.

Source: economic Times