Sunday, 5 August 2012

[www.keralites.net] How to invest for your children

 

How to invest for your children  

 Are you too much concerned about the future of your children?  The simple answer to this question is "Yes" every parent is concerned about the future of their children.  They are worried and anxious about their children's education, marriage, health etc.  Each and every parent thinking of investing some money regularly for the future expenses of their children and most of the parents are unable to put this thinking into practice due to various reasons like increasing education cost, persistent increases in inflation and cost of living, increasing rent, and costly health care services. In this article I will try to explain how to plan out your investments for funding your child's education and other needs once he is grown up.

There are certain points which one should keep in mind before choosing the investment options as it will help you generate optimum return and reasonable capital appreciation in future.  Planning for your child's future is very important that will help the child's education and general well-being
2. Amount involved is large – If you wish to get your child admission for Engineering, Medicine, MBA or any renowned professional course today, you need approximately 10-25 lakhs to complete the education. If we take only inflation presently which is around 8-10%, a very conservative costing estimate for pursuing the same course will be round 20-50 lakhs after 15-20 years. It's a huge amount. This requires careful planning in terms of your savings, selecting the right investment options, its proper execution, monitoring, re-balancing etc.
3. Requirement is certain and unavoidable – This understanding is important for you to invest in a disciplined way. You cannot afford to trade or speculate based on tips and free SMS suggestions received from unscrupulous  financial investment/insurance agents
4. Unexpected Expenses – future is uncertain, anything can happen, normally unexpected expenses comes in the form of medical or hospitalization expenses.
 
Investment Options
 
Now we have a fair idea of the capital requirement and the timeframe, let's start exploring the investment avenues, which will generate the required money in a given time frame:
 
1. Investment in PPF – One of the safest options of the lot is investment in a PPF account. It has the power of compounding plus the guarantee of assured returns. If you invest around Rs. 100,000 (maximum one can invest in a year) per year in a PPF account you will be able to meet some of the money requirement of your child after 20 years. Since this is backed by Government of India, the PPF is risk free instrument.  Presently the interest rate offered is 8.80% (w.e.f 01/04/2012 subject to change every year) and also the income earned on PPF investment is fully exempted from income tax.  The parent can also claim income tax rebate on the amount invested every year. The present 8.80% interest rate is not fixed; this may change in the future.  
2. Investment in Equity Shares – investment in selected company shares for long term is a good investment strategy, but you have to be very careful in selecting the good companies.  Once you invested in shares, you need to monitor the price movements.   In fact, when you make the investment the company was good, but subsequently that company started making loss or turn bad, in that situation there is no point in keeping those shares in your portfolio.  This will make your investment worthless over a period of time.   Whenever you feel that, your investment in a company is going to yield minus returns, sell those shares immediately and buy a good one with better profitability and growth.  Because this is one of the most risky investments, so you have to be extra cautious while selecting shares. If you do not have time or expertise to study equity, then you can invest in equity oriented mutual funds or take the help of an expert in this field.
3. Investment in Gold and Precious metals - Investments in Gold and Precious metals are one of the good investment options.  Instead of buying physical gold, go for Gold ETF (Gold Exchange Traded Funds), E-Gold from Stock Exchanges, Gold oriented Mutual Fund Schemes.
4. Investment in Bank Term Deposits/ Company Deposits - Presently banks are offering 9-11% interest on term deposits for different maturity periods.  It will be good, if you are able to lock your investment for long term at a higher rate.   The interest received from bank fixed deposit is taxable; any interest amount above Rs. 10,000.00, tax will be deducted at source. Company deposits are more risky when compared to bank deposits.
5. Investment in Equity oriented mutual funds – As the time horizon is very long it's advisable to take exposure in risky assets like equity. It's a well-known fact that in longer time horizon equity asset class gives the maximum return. The only effort needed from you is to find out the good and consistent high performing mutual fund schemes to invest in. As it's about your child the pain is worth taking. One additional advantage which comes with long term mutual fund/equity investment is that capital gains are tax exempt and also dividend received from equity mutual funds/equity shares are fully exempted from income tax. Select few good mutual funds and start investing right now.  It is recommended to invest via SIP (systematic investment plan) route.
6. Investment in Real Estate/Land – If you believe in invest and forget philosophy, the best option for you is investment in real estate. Buy a real estate property and leave it for few years and watch its value grow.  Real estate, in many cases may give better returns than equities.
7.  Child Plans / ULIP/ Insurance – There are lot of child linked plans being offered by various vendors and some of them might cater to your need. While investing in such plans just be careful about various kinds of fee the insurance companies charge for managing your fund. In most of the cases the returns are not so handsome post the management fee and other charges.  Better option is to take term insurance policies to just cover the life and balance amount invest in some of the investment options discussed earlier.
Investment options suggested above is not complete; when time goes new investment opportunity may come with better and attractive returns.  Don't strict to the original portfolio allocation; rebalance your portfolio on a timely basis subject to the changes in the financial market and also your risk/return expectations. The investment options suggested above   will definitely take care of your child's future needs. Taking an early decision will make things easier for you but you need to be slightly careful while taking exposure in equities as it requires knowledge and monitoring at regular intervals. Laying out a proper plan and making a disciplined effort will give you peace of mind as this will ensure your child's long term needs are met.

In case you are not knowledgeable enough and don't have time, take the help of an expert and reliable Financial Planner.

Best Regards
Prakash Nair
www.keralites.net

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