Start saving early to ensure the best of all worlds for your child

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Published: July 21, 2015 12:03 AM

It is advisable to save for near-term goals via debt instruments, and invest in equity instruments for long-term goals, such as education or marriage

Every parent wishes to provide the best for his children, be it higher education, marriage, or even buying them their first car. Achieving this requires a multi-pronged approach.

To begin with, it’s important to keep a tight control on the cash flow as money management is crucial to ensuring financial success. If one is not sure where the money is flowing out to, it is difficult to manage it. Ideally, one should have in place a monthly budget, charting out the income and expenses. This will ensure that unnecessary debt doesn’t pile up.

The next logical step is to determine a financial plan — deciding on the crucial life events one has to plan for, ranging from education to marriage, and the time-frame for achieving these goals . For example, if you have a two-year-old child, you have at least 23-25 years to his marriage, which gives you enough time to start saving for it.

It is crucial to start saving as early as possible to benefit from the power of compounding.

Let’s assume you have a financial goal of reaching R50 lakh as your target amount in 10 years, and the rate of interest is 14%. Then, you need to invest R18,853 every month for 10 years to reach your financial goal. Now, assuming you have 15 years to achieve the same goal, 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.) via debt instruments, and invest in equity instruments for long-term goals, such as education or marriage.

You could use avenues like PPF, balanced/large-cap mutual funds or insurance plans based on your preference. We would suggest that you invest in the equity markets through a mutual fund as they need not be monitored on a daily basis. Also, you need not be a seasoned investor to take advantage of the equity market.

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 your portfolio in gold is advisable. However, given the current scenario, we would suggest that you purchase physical gold only for essential requirements, such as marriages, etc, and invest in it through ETFs/mutual funds in order to diversify — this is especially true if a majority of your 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 for you to invest in mutual funds through Systematic Investment plans.

Under an SIP, you don’t need to time the market, as the investment takes place each month irrespective of the market conditions. It is advisable to remain invested in SIPs for as long as possible, as you can then benefit from the power of compounding.

Selecting an investment avenue will depend on one’s risk profile and the time-frame for a particular need.

The writer is CEO & founder, Right Horizons

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