7 rules to keep in mind while investing for your children

31 MARCH, 2022

Planning for your child’s financial future is not complicated if you follow these rules

Every parent wants to build a secure future for their child. With the help of a good finance professional and strong financial discipline, it is easy to do so. If you are confused as a parent on how to build a corpus, it would help to go down the SIP (Systematic Investment Plan) route via mutual funds.

Planning for your child’s financial future is not complicated if you follow these 7 rules:

• Start Early: This cannot be emphasized enough. The earlier you plan for your child’s future the better. A SIP of Rs. 6,000 per month for 21 years at a 10% return will give your child a corpus of Rs. 48.16 lakh in 21 years. That’s a solid foundation for your child’s future education. However, if you delay your SIP by just 5 years, you will have to invest ~Rs. 10,700 every month to hit the same target. If you delay it by 10 years, the amount goes up to ~Rs. 21,000.
• Account for inflation while planning: An education that costs Rs. 20 lakh today will probably cost Rs. 30 lakh in 20 years. A house that costs Rs. 1 crore today will probably cost Rs. 2-3 crore in 20 years. So you should not be planning for your children’s future with today’s prices in mind.
• Build a portfolio according to your risk profile: Some investors are very conservative while others are aggressive. Make sure that you explain to your finance professional very clearly the kind of volatility you are willing to accept in your investments. Plan your portfolio accordingly.
• Increase SIP amounts when possible: If you get a bonus or a more-than-expected increment, use that to boost your children’s SIP. That will ensure that the education loan amount for your child will be less. Or it will result in a higher corpus for your child.
• Track funds periodically: You have a time period of 15-20 years to build a corpus for your child. Ensure that you are tracking your funds and talk to your finance professional once every year regarding the same. You should know the health status of your investments once a year at least.
• Take risks early on, switch to less volatile funds later: If you have 20 years to build a corpus for your child, you can consider investing in funds which are high risk-high return, however as you get closer to the goal, you should migrate to a slightly less risks fund. This is needed as investment horizon shrinks and risk appetite reduces. 
• Funds Should Be Withdrawn in the Last 2-3 years: One should withdraw funds from equity investments and park them in fixed-tenured instruments for the last 2-3 years of the investment horizon. This will ensure that your corpus won’t get affected by a sudden change in the market.

Source: MFI Explorer | Data as on 31^st March, 2022

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Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.