Children are the greatest gift from God and we all want the best for our children, be it healthcare, education, marriage, etc. To safeguard our children's future, we must take care to avoid some common mistakes many of us commit. As Warren Buffet says, "You only have to do very few things right in your life so long as you don't do too many things wrong." So here's a list of 'Don'ts' while planning your child's future:
t Avoid products with exposure to only debt investments: Investing for children often means you want to save for the long term and create a corpus for foreseeable expenditures such as those on higher education and weddings. The cost of education is increasing faster than most of those in other areas of life (approx 10-12% per annum), and shows no sign of slowing. Guaranteed fixed income products like fixed deposits, post office schemes, etc, though considered safe, would not be able to beat inflation in education costs and would lead to an insufficient corpus to meet the actual cost. Hence, parents should not park all the money set aside for their children's future in fixed income instruments. They should consider investing in equities which would possibly give the best inflation-adjusted return over the long term.
t Avoid investing in short-term products: Many parents just park the money they save for their children in fixed deposits of 1-5 years tenure. Since the goal is 10-15 years away, investing in short-term fixed deposits would not yield the desired results, and it needs to be re-invested every time it matures at the rate prevailing at that point of time, which may not be very attractive.
t Do not redeem before the goal date or fulfilling required purpose: Many a times, when we see volatility in the equity market, we tend to switch funds from equities to bonds though our investment horizon is long term in nature.Parents should avoid timing the market and rather invest in a disciplined manner towards their goal. Rebalancing the portfolio based on changing needs or situations should of course be done on a regular basis, but redeeming from equity to invest in bonds because of short-term volatility should be avoided.
t Do not invest all the money in gold: Gold holds an emotional charm for most Indians. Many parents invest a majority of the money saved for their children in gold for their child's marriage. However, the expenditure incurred on gold in the marriage would constitute 20% to 25% of the overall spending. It is rightly said, do not put all your eggs in one basket. Similarly, the money saved for the child's marriage should be suitably divided among various investment classes. Investment in gold should not be more than 10-20% of the overall portfolio.
t An absolute no to child plans from insurance companies: The name 'child policy' looks very attractive and connects directly with our goal, but these insurance products are nothing but renamed endowment, money back or ULIP policies with similar features. These policies carry high costs and in some cases elements of guaranteed returns can lead to highly conservative investments, thereby providing very low returns that are unable to beat the rise in cost of education. Even though these plans are always sold with an emotional pitch and through highly creative advertisements, getting drawn by the promised returns may only end up causing a severe dent in your child's education plans.
To conclude, fortunately, there are enough investment products to help parents fulfil their dreams for their children. If they avoid making basic mistakes and choose appropriate available products, these options can help you save enough to send your child to the best colleges in the world, or organise that big fat Indian wedding.
NEXT WEEK
This week, Nikhil Kothari gives us an idea about what mis-steps to avoid while putting in place a plan for your child. Next week, we will delve into the same subject in more detail.
The author is director & chief financial planner, Etica Wealth Management
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