Children, they say are God’s gift to us. God did his job but we as parents have ours left. Investing for your child’s future is the onus of parents and fortunately in India, parents take this seriously.
The only issue is that they start investing in the wrong products and that is probably because they have not done their financial planning yet. Don’t panic – here is a guide on investing money for your child.
I have tried to break this down phase wise till the child starts earning. I hope you find this useful and this helps you immensely in investing for child’s future.
Investing for child future till pre-school
As soon as your child is born, your expenses shoot up. Emotional exuberance is at a all time high and you shop till you drop. It is at this time that you also need to take stock of your finances and start investing for child future.
The best option to start with is a Public Provident Fund or PPF. This is one of the most important, safest and must have investment for your child. Note that the amount of investment in the PPF needs to vary – you cannot assume here that you need to throw in the maximum Rs 1 lakh in it. You also need to understand that this is for long term goals.
When a child is born, there is a lot of gifting that happens. While some like to gift toys and other baby products, others especially close relatives give cash. Most of the parents including yours truly, have been guilty of spending that money. In order to use it in the best means possible, open a kid’s bank account and begin to park all such gifted money in it. Its to initiate the smart investing for child future.
Note that any money that comes in this bank account can be channeled into smart investing for child future – say the PPF account which was opened.
I
n India, kids are often gifted gold by parents or siblings. This is very common on birthdays, especially the first big bang one ! By accepting these gold-en gifts, you are implicitly investing. In fact, gifts from your side can also be gold products. And if it’s a girl child, diamonds !
The child will eventually go to day care and school. If you want to keep aside money for that, begin to sue suitable debt products. Even a recurring fixed deposit will serve the purpose.
Most of the parents don’t save for school expenses and consider it as an expense from their income so they don’t explicitly plan to park the money that might be needed for the child’s schooling. If it is required, use recurring FDs or short term debt products.
For all the long term goals of the child like college and higher education and marriage, do goal based investing in equity. Read up on how to do equity investment and why long term investing works best in such a scenario.
While direct stock trading is an option you can explore, better park a big amount of your monthly surplus in equity diversified mutual funds via systematic investment planning of mutual funds. You go in for a healthy mix of small cap, mid cal and large cap mutual funds when investing for child future.
Note that as parents, you still have the responsibility to take care of other below important things. Miss any of these and your family is bound to suffer.
1. Ramp up your insurance cover by taking a term insurance. Your liability has increased with the new born kid.
2. Include your new child in your health insurance cover.
3. Try not to invest in Unit Linked Insurance Plans or insurance policies that are geared up towards investment for children. You will be milked high and dry by insurance agents and riding high on your child-emotional-exuberance, you might cave in to their demands. Don’t make a mistake here that will cost you big time.
4. Make a will and name your spouse and child in it.
Investing till high school
This is the stage when your expenses begin to shoot up the curve. But thankfully, time spent at the office in graying your hairs is also fetching you some added income to take on the increased expenses.
You still need to continue doing most of the things that you started for investing for child future – investing for long term goals via mutual funds, putting away gifts in the child’s bank account, investing in PPF, gifting gold on birthdays and others mentioned above.
I must admit that this can be the most challenging phase for a parent. The child is moving to be independent and his/her demands will always fall short of what the parent is offering. Birthday parties and outings will be more frequent and pocket money expenses will grow steadily.
But this is the time when you need to introduce the child to money matters. You should begin to educate and teach the child about how to handle a debit card and cheque book. Logging into online bank accounts can come a bit later on but that is a must as well as it teaches your child to see how the account is debited and credited.
What is on your radar during these years is the college expenses that you will incur depending on where your child wants to go.
Depending on when you start investing in this, go in for a healthy mix of equity and debt. As soon as you are 3-4 years away from the child going to college, move the corpus to debt investments as capital protection is more important at this point than returns.
Note that as you progress the years towards end of high school, you need to begin to move away from small caps and mid caps to large cap mutual funds. The small and mid caps were used to give a kicker of returns with time on your side but now that the goals are coming nearer, the idea is to move into safer investments.
Note that the PPF could be nearing its end term and you can withdraw from it for your child’s college expenses.
When the child nears to end of high school, you can begin to contemplate a separate health cover for him. This is not an absolute must but might make sense depending on a case to case basis.
A family floater health insurance with adequate sum assured will do the trick but do check at your end.
This is also the time when you can begin to think of putting in money in Gold ETFs for long term goals. But keep this limited only to a maximum of 3-5% of the portfolio.
Note that the physical gold that you got as gifts might not suffice his/her needs in the future, so this might come handy then.
Investing while (s)he is in college
Once your child has moved to college, you have probably used up all the savings meant for his education. But this is also the time when you need to re-assess whether he will go for a higher education like MBA or not.
A lot of kids go for higher studies straight after their graduation while others do a job for some years and then take the plunge. Depending on which category your child falls in, the goal will become either short term or long term. Even if it is long term, consider it a maximum 5 years and then invest.
Do not compromise your retirement savings
If you assess at this point that the money you have saved for your child’s higher education is not enough, then do not take the shortfall from your retirement savings.
Either have your child take a educational loan or look at alternatives like the child working for some years to accumulate the money before he can go for higher studies – if you as a responsible parent have inculcated in him good money habits, he will understand.
At this point of time, the only future goal that you need to keep saving for your child is his/her marriage. Depending on when that happens, invest in the right products but avoid lock in products like PPF here. In fact, the PPF will be nearing its 15 year end term and you can look to use that money for his marriage, if it is not already used for any other goal.
In case you have no clarity on where the PPF is going to be used, then extend it for 5 years by which time more clarity can come for your child. And our course, continue with the Gold ETFs.
If you do all these things smartly, you will come away as a happy and successful parent and then plan for another innings of investing money for your child !
One of the good point is to teach money matters to your child.
Our education system lack financial education it only teach you that hard work is required to earn money but it doesn’t provide any education for how to invest and utilize hard earned money. Even parents are not bothered about it.
Sometimes children look your designation and assume your salary. But we need to educate them that where salary goes like loans, investment, household expenses etc. This will also help them to understand financial responsibility and they will be less demanding. This will also help them at the time when they start earnings.
You have brought up a very valid point Kranti. I think our education system needs to being in personal finance courses.
It is very ironical that we spend so much money educating our kids so that they have better lives and once they are well settled and earn well, they don;t know how to invest !
So whatever hard work we did, our kids waste away the money be investing unwisely.
I have heard they have enforced sex education in some schools, in the same way, they should to personal finance. It is a very important ingredient in everyone’s lives.
The point you have raised is very valid but I think it is far away from becoming a truth.
In our society even adults don’t recognise the importance of personal finance and financial planning. The investments done and the reasons behind doing those investments are unwise too.
I think it is important to spread the awareness and educate adults first so that they can set an example for their children and may be then educational institutes will get a wake up call.
Excellent post, liked the break-up mentioned for each stage of life. Should be helpful for one and all. I am not a fan of Gold-ETF’s its more to diversify your portfolio and i feel Debt funds would beat Gold-ETF’s in the long run. One more point i would like to highlight is you mentioned to create a will and include spouse and child. I would like to differ here, i would want only the spouse to be named in the will initially. I have seen many instances wherein parents make their children as nominee to house/will and when one of the parent dies the other one ends up in an old-age home. Or the children go to study abroad and settle there and don’t bother about their parents well-being. I have seen more than one instance of the above case in my neighborhood.
But don’t you think those scenarios could be managed well if the will is written properly?
A will is like an empty field where you can set your own rules and play the game. Why should a wise and obedient child suffer just by looking at unwise and disobedient children in the neighbourhood?
I think a child has equal right to be present in the will. All the conditions to protect spouse, which of course should be the priority, can be mentioned in the will. You just need a smart and educated lawyer.
Why are you not a fan of Gold ETFs ?
Regarding the will, what happens if both the parents pass away ? A will needs to be made in such a way that “conditional” transfer of assets can happen. Its easy and lawyers can do that for you.
@TheWealthWisher,
As per my view Gold has appreciated only in the last 2-3 years and there is no guarantee that it will appreciate further. I am more comfortable investing in debt funds.
As for the will, yes if there is a clause that transfer of assets will happen on condition then its worth looking into it. What is the best age to create a will, Can it be changed?. I will give you an example, Suppose a father creates a will and appoints his wife, son & daugther. Now the Son goes abroad and settles there and does not care about his parents. Its the daughter who looks after them, not financially though.
Now if the Father changes his will and appoints his daughter to get the sole position of his property, will the son have right to challenge it in the court many years later after his parents death.?
All wills can be challenged.
In the above case, if the will was made formally and register, the court will keep aside the challenge and award it to the daughter.
Will can be changed by something called codicils.
Another article topic !
@TheWealthWisher,
Thanks for the clarification, if the court rules in favor of the daughter then justice is done. I just don’t want people to take credit for nothing. By codicils you meant additions/updates to existing will?
Yes
While the article talks about how we can plan for child’s future, I’d like to mention what not to do as well: –
1) Do no buy life insurance for your child. Many grandparents buy life insurance [mixed with investment] policies in the name of their grand children and gift them. It is of no use because [GOD forbid] in case something happens to a child there is no financial burden on the parents. It is a huge emotional burden but nothing financial.
2) Do not buy child education or any similar plans from insurance companies. The returns are not going to beat the educational inflation of college fee. You are better off investing in equity mutual funds.
3) This is my personal belief and individuals can have different opinion. Do not save for child’s post graduation. After graduation your child will be smart enough to work and arrange money for any further education he/she may want to pursue. This will teach them to value money and also about financial planning.
Alternate could be to take an education loan. The money you want to save for child’s post graduation could be invested in building retirement corpus.
Instead of taking child plan, one can take term plan+Mutual fund combination and I am sure it will beat any child plan in long term.
Yes but term plan for oneself and not for the child. If one already has a term plan the sum assured must be increased.
The first one is an absolute truth – so many grandparents gift LIC policies, its amazing.
It shows how LIC has gone from selling its product to make them gifting entities and this is what investors need to change in their mind.
Most of thee are anyway endowment plans so do not make sense at all.
Apart of making will, every body should share their finacial status, assets information and isurance policy with their spouce. In indian society wifes are less interested in financial matter and it left for husband. In unforseen condition when husband dies, it is nightmare of wife to handle all financial matters. So even you have made good finacial portfolio, have taken enough insurance and your wife is not aware of it, others will take advantage of it and your family will suffer in future.
Couldn’t agree more with you Kranti.
Any specific reason for disagreement
I meant I fully agree with you my friend 🙂
@Kranti,
Very valid point. It should be the husband’s duty to educate the spouse on various investments he has done, also the spouse should take keen interest to know about it. Most of the time ego comes in between.
Even interest.
Many folks are just not interested. And interest is something which can only come from within.
I agree on the interest point. These days it is more of lack of interest than ego.
I think it is in mindset of the people, Men have been associated with looking after Money and women at household chores. For many generations women’s financial decisions were done by her Father, Husband and Sons. This has to be changed now.
I am thinking of coming up with an article that covers this, do you or anyone have any such kind of kit that will help me in assembling that article ? Basically, what I am looking for is a method/way to pass on all such information to the living members.
Are you looking for ways how we can educate spouse on the insurance and investments made? If yes, I can share the methods I have been using, would that help?
No, I am looking for a kit which a spouse can leave behind for his loved ones when he/she passes away and that kit can be used to know all about the investments and monies that were made and that exist for the family.
Please look into following link. Might be this is what you are looking for
http://www.jagoinvestor.com/2011/01/financial-details-emergency.html
I have read one method somedays ago in jagoinvestor (manish chauhan’s blog). If you want, i will search it and provide to you
Excellent article trying to give comprehensive investment options available for funding a child’s future. Unfortunately, the most marketed option is Child Plan – which is also the worst investment option.
I also wish to add another (non financial) advise or rather ask a question. Shouldn’t we stop funding our children after they achieve a particular age and have minimum education ? Why should we fund for their MBAs when they can get a bank loan and get into a job and repay their loans ? It is a matter of choice and sentiments for Indian families, but would the children fund our retirement the way we would fund their higher education ? Movies like Baghbaan are a true reflection out there whereby Mr. Bachhan gave away his retirement pot for his kid’s lifestyle and was later left to ruin !
Regards
BFA
Its depend on person to person. If person is able to fund both his child education and retirement then no need to take loan. Here point is dont fund for higher education in cost of retirement funds. If you feel that your child is capable of repaying loan than dont risk your retirement funds just take loan.
Even if a person is able to fund both, don’t you think it is better to let the child plan for oneself? In my opinion it’d allow the child to learn financial planning, value money and make the child financially independent.
What do you think?
Yes I am agree with you. Person need to take steps to educate finance to his child. Sometimes steps can be hard but fruitful in future.
@BFA,
Agree with you on children funding their higher education. In most of the western countries parents provide basic education and then the children go on their by either taking loans or part-time jobs. I think we should follow the same here too, this will create more sense of responsibilities on the children. No spoon feeding all the time.
Thanks Rakesh. The important thing to note here is that hence in western countries not many kids go for higher educations. They get trapped by the job market and then the opportunity cost to go for an education seems to be quite high ! Hence along with financial education, the kids would also need to be fed right from their childhood that they need to do job for 2 years before studying as well as importance of completing minimum amount of education.
It is an interesting saying in Hindi which says that if you have smart child, then what ever you save – he won’t use it, rather multiply it. If you have a child is a ‘Kapoot’, he would destroy what ever you save. Hence better get it into your financial planning to ensure that you Insure against a ‘Kapoot’. And if you have a ‘Sapoot’, then nothing like it 🙂
Regards
BFA
Our kids will not fund our retirement for sure.
In India, unlike the west, parents and kids still are one unit till a very later stage in life. Even today, the parent funds higher education of his child at the cost of less savings for his retirement. And this is what needs to stop.
I am not sure whether the funding has to be till a certain age, but I think I would educate my kids till college and not beyond that.
While the decision is simple, I am also afraid that when my child takes on an educational loan, I will have to guide her/him to pay that off, blow away the income and save as well. In my opinion, that is when the practical financial planning of the child actually starts.
Instead of taking education loan wouldn’t it be better if we encourage them to work for a while, save some money and then pursue higher education?
The only risk is when one starts earning decent money the person lose interest in further studies.
You can take the risk of explaining it to the kids but they wont listen. Also, quite a few of them want to get into higher studies. What they earn in the first 203 years of their career cannot fund even 50% of higher MBA fees. So loan is needed.
Yes, MBA fees have skyrocketed over the past few years. But at least they should they have that sense of responsibility that they must fund their post-graduation. I know couple of kids in my apartment who completed their engineering and worked in IT industry for two years and quit their jobs and funded part of their MBA course. Now they are managers with leading banks.
You are right, quick money is only in IT industry. In other industries it will take more time to save money for higher studies.
I know guys in IT who buy a house, travel to US, Europe, Australia and pay off the loan and then buy another house !
They also quote the reason for going abroad is to pay off the loan and not really to learn from working there 🙂 Compared to the IT chaps, all other industries suffer a lot. Manufacturing, BPO, finance – you take any, there is no quick money anywhere compared to what IT provides.
Agree BFA. I am investing for my child’s graduation money only. Any further studies have to be planned and funded by himself. Even if I could afford I would want my child to be independent and plan for his own future.
About funding the retirement, it’d be foolish to expect child to do that. We won’t be setting a good example of financial planning if we pass on that burden to our child. If we start investing early we can easily plan for our retirement.
My father planned for himself and set an example for me and I am now doing the same.
Agree that there is more money in IT but then there is more stress, work-pressure, unreal deadlines in IT as compared to other fields.
Found another article on similar lines. It presents some interesting stats and highlights many people start investing for their children between 0-3 years of age but investment instruments are majorily in PPF, FDs and traditional insurance policies.
http://articles.economictimes.indiatimes.com/2011-04-18/news/29425632_1_child-insurance-plans-investments-mutual-funds-and-stocks
Interesting graphics !
@TheWealthWisher,
I think it would be good if we could get rid of the markings. Even for good posts i see -ve marking. This could discourage people for reading the comment.
Radhey, I have seen several such articles. This is quite well written and unique since it reminds the reader that child’s education is not a one-shot expense. The money requirement is also pretty dynamic depending on the interests of the child’s, aptitude and actual school performance. Sometimes kids drop out of one course and join something else! This will play havoc on ones finances and there is no way you can plan for such things.
PPF is an excellent debt option where you can park a good portion of the investment if you begin early. The downside is you have to begin early. The year your child finishes school should be the 15th financial year of your PPF account.
If want to start a PPF when your child is 3 the amount will not mature the year your child finishes school (unless your child flunks an year!).
Sometime back a financial advisor wanted me to make a calculator where you calculate the money required for each year of UG education and PG education. I found it much better that planning this as a one-shot goal for one degree.
Also it is important to keep track of college fees each year even if its several years away for your child.
Absolutely right Pattu about tracking college feed. The college fees is hiked so drastically that one needs to monitor it closely and adjust that goal accordingly, more frequently than other goals.
Yes Pattu, you are so right. Expenses, especially educational one, are changing in India very fast. So tracking them helps.
I personally think most of the folks do not invest in PPF for their kids, and they do it only in their and spouses name. There is nothing wrong in that if the asset allocation dictates such a scenario.
Did you make the calculator ? I am yet to review the retirement one you sent.
Glad you liked the article.
Yes I did. Its a standard goal planner. The 4 years of UG and 2 years of PG degree costs are taken into account separately that is all.
After I made this I realized this goal is not like a car or a holiday where the entire corpus vanishes in one go and investing stops. Assuming he/she will study one pg degree for 2 years, from the day your child enters college (for UG) you have at least 5/6 more years of expenses for which you should continue saving. So splitting the goal helps because if school graduation is x years away the first goal is x years away and the last goal x+5 years away. This also helps take into account estimated inflation after your child enters college.
Seeing this I redid the retirement calculator also this way: If you retire at 60 and expect to live till 90, future expenses can be split into 30 different goals. The answer in this case is the same as the standard retirement calculator. So no benefit of doing it this way expect to check if the formulae used are right!
@Pattu,
Thanks for sharing your views? As you have also included PG degree in your goals, would like to know your views on kids funding their own post graduation either through loans or parents funding part of it?
This is an emotional decision and one that usually determines how financially independent the parents will be in retirement since most people dip into their retirement corpus for education or marriage needs.
Its a difficult choice: Would you choose to live a less expensive lifestyle in retirement or would you let your child start her/his life in debt with an educational loan EMI?
If the child is smart, has a real passion for the subject, hard working etc. go for the loan he/she is likely to close it asap. If the child is only so -so in intellect and wants a PG degree only for “better job prospects” or is sill not clear about what to do in life then make them work for sometime and earn themselves a PG. Taking loan or using retirement funds for such children is a risk since the parents are the guarantors. Either way your retirement will suffer.
You will need to be ruthlessly professional in safe guarding your investments and yourselves.
@Pattu @Rakesh
I am clear about this. I am not going to save for PG of my child. If he is smart and intelligent he will arrange for himself. If he is so-so then he wouldn’t need it. Either way I don’t have to worry.
If I end up building more corpus than required for my retirement then I might think about it.
@Pattu,
Thanks for your detailed explanation, will keep in mind while planning my goals.