Saving for kid? Slow and steady wins the race

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Published: October 16, 2015 12:23:44 AM

LIKE any other parent, you would like your kids to get the best of everything in life. To achieve that, of utmost importance is to keep a tight control on the cash flow.

LIKE any other parent, you would like your kids to get the best of everything in life. To achieve that, of utmost importance is to keep a tight control on the cash flow. Ideally, one should have a monthly budget charting out the income and various expenses. This will ensure that savings and investments are done each month and unnecessary debt doesn’t pile up.

The next step is to work out a financial plan, which needs to take into account the events you need to save for and the time-frame for them. For example, if you are planning for a newborn, there would be at least 23-25 years before marriage is on the cards, which gives you enough time to start saving. It is crucial to start saving at the earliest to benefit from the power of compounding. For example, assume you have a financial goal of reaching R50 lakh as your target amount in 10 years, and the rate of interest is 14%. You need to invest R18,853 a month for 10 years to reach your financial goal. Assume the goal has now become a longer duration plan: Then, to achieve the same financial goal of R50 lakh in 15 years at 14% interest, you need to invest just R8,316 every month.

It is also advisable to save for near-term goals (such as food, toys, medicine, etc.) in debt instruments, and invest in equity instruments for the long term, such as education or marriage. We suggest that one invest in the equity markets through a mutual fund since they do not need to be monitored on a daily basis — you don’t need to be a professional investor to benefit from the returns in the equity markets.

Debt instruments are much less volatile with the capital being more or less assured, but give lower returns. It is always advisable to have at least 20% of the portfolio in debt instruments. Gold is another interesting investment avenue, especially since it is regarded as a safe haven in times of distress. Having around 5-10% of one’s portfolio in gold is advisable. However, given the current scenario, we would suggest that one purchase physical gold only for essential requirements, such as marriages, etc,, and invest in it through ETFs/mutual funds to diversify — this is especially true if the majority of one’s investments are in equities.

One needs to choose an investment plan that has the highest potential for growth at as low risk as possible. It is advisable to invest in mutual funds through Systematic Investment Plans (SIP). Since SIPs ensure that one doesn’t need to time the market, the investment takes place each month irrespective of the market condition. Individuals can benefits from both an up-market and down-market. It is advisable to remain invested through SIPs for as long as possible, as investors can then benefit from the power of compounding.

One can also set up a trust to ensure that your child is taken care of — for example, if you want to leave R5 crore to your daughter, but are worried that she will spend most of it in a few years, you can leave this money to a trust with instructions on disbursing it.

The R5 crore can be invested and the interest paid each year into her account to take care of her education, etc., and once certain criterion are met (such as graduating from college, working for a certain number of years, etc.) the principal amount can be given to her. In such a case, a trust works in safeguarding your assets till you expect your child to be ready to handle the money.

The writer is CEO & founder, Right Horizons

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