FINANCIAL PLANNING

Big plans for your little ones

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How to plan a secure future for your child

The joy of being a parent cannot possibly be described in words. From the time you hold your little bundle of joy, your life takes a wonderful turn. Your children become the centre of your world and all your energies are focused on protecting and providing for them. As part of this, building a secure financial future for them becomes your top priority, and it becomes imperative that you manage your finances well.

With the rising cost of living, investing only in simple savings instruments such as fixed deposits and saving accounts will not be sufficient for you to accumulate a healthy corpus of funds. You need to expand your investment portfolio and include options that will help you register capital growth and build long-term wealth. It is generally recommended that, when planning long-term investments, at least 80 per cent of funds be invested in growth assets. However, given the plethora of investment options available, selecting the right one might be a challenge. Below are a few options that you must consider as you invest for your child’s future.

EQUITIES

With all the positive news about the Indian economy, it would be wise if parents allocate some amount of their investment for equities. Equities usually give 4 to 5 per cent returns over the nominal GDP growth and, historically, have offered long-term compounded annual growth rate (CAGR) of 15 to 16 per cent over a period of 15 to 20 years. This would be the same time frame you would consider while investing for your children's future. Assuming a 15 per cent CAGR, a sum of Rs 1 lakh invested in equities would grow to around Rs 4.04 lakh in 10 years, compared with 01.96 lakh in an FD (at the current interest rate of 7 per cent). This shows that investing in equities is any day a better proposition.

However, equities do not offer secular returns, which one generally gets from FDs. Also, you have to do thorough research before investing in equities. Though you might hear conflicting opinions about long-term investing in India, just remember that shares worth 01 lakh in Infosys, bought 10 years back, would have given you about Rs 6 lakh today. To make the most of this growth asset, you can seek help from financial experts, who will tell you what percentage of equities you should have in your portfolio. If you are unsure about investing in equities directly, you can adopt the mutual funds route, too.

EQUITY MUTUAL FUNDS

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These offer you the benefit of capital appreciation at relatively lower risk by diversifying your investment in various companies. By investing in equity funds through the systematic investment plan route, you can accumulate a healthy sum without a heavy monthly burden on your pocket. A monthly SIP of Rs 5,000 in equity mutual funds, for 10 years, can fetch you Rs 11.6 lakh, assuming a return of 12 per cent per annum. Even considering an inflation of 6 per cent per annum, this amount would beat the returns offered by FDs, which generally provide real return of around 2 per cent (real return=nominal return-inflation). You can also explore this option from a tax planning perspective. Investments in equity mutual funds for more than one year are exempted from capital gains tax on their redemption. Similarly, you can avail income tax exemptions under section 80C by investing in equity linked savings scheme (ELSS), which gives 30 per cent tax exemption, under section 80C, on a sum invested with a lock-in of three years.

E-GOLD OR GOLD ETFS

All important celebrations in India, be it weddings or festivals, are marked with the buying and gifting of gold. As a parent, while you might want to invest in gold for such events, think of holding this precious metal in the electronic form or exchange-traded funds (ETFs). Investment in E-gold and ETFs do not entail concerns of theft and additional costs such as locker charges. As these options can be bought in small quantities, you can plan the investments as per your future requirements. It is advisable to make short- to medium-term investment in this asset class, as long-term returns on the yellow metal are relatively poor. Gold is no more than a hedge against geopolitical tensions or inflation in developed countries and, hence, is not a recommended option for long-term investment. Unlike equities, which offer dividend and capital appreciation, gold is not a productive asset. Prepare for all important occasions in your child’s life by allocating around 5 to 10 per cent of your investible funds for this option.

DEBT INSTRUMENTS

All financial requirements would not materialise in the long-term. Certain expenses, like health care, school fees, holidays, would occur in the short term and, in some cases, on a recurring basis. To meet such requirements, investing in equities would not be advisable. You may look at debt mutual fund schemes, which are not only liquid in nature, but also give decent returns. You can opt for SIP in the debt mutual fund to build a corpus for short-term contingencies. These funds generally offer around 7 to 8 per cent returns, along with tax benefits in some cases.

TAX-FREE OPTIONS

Options such as public provident fund and the Sukanya Samriddhi Scheme for the girl child offer interest in the range of 7 to 9 per cent, and are eligible for tax deductions under section 80C. Depending on your foreseeable financial expenses, you can decide the time horizon for investment in these securities.

While the above instruments will help you prepare financially to fulfil the needs of your child, do not undermine the importance of having a term-life insurance for yourself. This will ensure that your children will be financially secured in case of any unforeseen event. Start investing early to amass large wealth in the long-term without incurring a significant outflow of funds on a monthly basis. With the magic of compounding and proper planning, you will definitely be able to gift a financially secured future to your beloved children.

The writer is managing director and CEO, Axis Securities

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