Financial Planing: Plan to Support Your Child’s Aspirations
D P Singh Chief Business Officer, SBI Mutual Fund writes an article for SMEStreet on the subject of financial planning for all those who are visualising a better future for their children.
Article by D P Singh, Chief Business Officer, SBI Mutual Fund
As parents, one thing that you would want for your child is for him/her to get the best of everything in life. The environment that kids are exposed to today is drastically different to what you experienced in your childhood. While there are many more opportunities for kids these days, the world is also getting that much more competitive and fiercer, be it in education or sports. That’s why you would want holistic development for your child so that he/she is prepared for every future challenge.
Traditionally, you as a parent would only end up planning for your child’s education. Given the kind of exposure that children get today, they are likely to explore unconventional career paths and aspire to become a coder, a gamer, an artist, an entrepreneur at a young age or make a career in sports. All these unconventional career paths do not yield immediate and regular income and thus need better financial planning at parents’ end.
Today if your child wants to follow his / her passion of becoming a professional athlete or enter the creative field, it will require significant financial commitment on your end. The cost of the equipment’s and training required for these career paths can be significantly high and is over and above the normal education cost. Moreover, the education landscape has also drastically changed. Today, online learning has become a norm and gadgets such as a laptop, a tablet or smartphone has become a necessity. And this becomes an ongoing expense as technology soon becomes obsolete and needs upgrades. Hence, you as the new age parents need to factor in a lot more than just school and college fees for your child. In order to give wings to your child’s aspirations, financial support is of utmost importance.
But are you prepared for it?
While its essential to let your child dream and pursue his/her passion, it is equally crucial for you to have an investment plan. Like for every other goal in your life, preparing an investment plan to meet the financial needs that may arise at different stages of your child’s growth, can help avoid stress in future. For this it is essential that you start early and invest in appropriate investment avenues that have the potential for long-term wealth creation.
You may have planned for these expenses through traditional investment avenues but at the same time investments in market linked instruments such as mutual funds are also needed. That’s not it, you should invest in your child’s name so that you don’t end up disturbing these savings in times of need and the money is only utilized for the intended purpose. Premature withdrawals from the fund allocated for your child can disturb the target corpus that you plan to achieve. Children’s Funds offered by mutual funds are one avenue which can be looked at for long term wealth creation. These funds also have a lock-in period, say of 5 years, to discourage early withdrawals and to help you stay committed to the goal.
You should start investing at the earliest and in a systematic manner as it can help you build the required corpus by investing smaller amount on a regular basis. This is because the longer you stay invested, higher is the compound effect, eventually helping you build a higher corpus. In addition to staying invested for long-term, what can further accelerate the building of your target corpus is SIP Top-up. With rise in your income levels, the amount that you set aside for your child should also rise.
Children’s Fund offer different plans which cater to different investor risk profiles. The decision to choose from either an equity-oriented fund or debt-oriented fund should be based on your risk profile, investment horizon and the corpus you intend to build. You can invest in these funds until the child turns 18. So, if you are starting early and have a longer investment horizon it is advisable to invest in a fund that has higher allocation to equities.
Rising inflation can adversely impact your investments plans. Therefore, investment in equities can act as a hedge against rising inflation by generating inflation adjusted returns. Historically, the education cost inflation has been higher than overall inflation. And now with education landscape rapidly changing, education cost is also expected to move up at a much higher pace. Thus, systematic and longer-term investments in equities can help in mitigating the adversities of rising inflation and also help beat short-term market volatility. It can also fulfil your dreams to be able to send your children to the best of schools, colleges, and foreign universities. So, applying what Swami Vivekanand said in the investment parlance “arise, awake and stop not your investments till your financial goal is reached”. The need of the hour is to start investing now!