5 common mistakes to avoid while investing for your children

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October 07, 2021 11:19 AM

We take a look at five common mistakes parents should avoid while investing for their kids.

Concentration of investment in one particular asset class could prove disastrous in the long term.

Children are the biggest assets of a family. Investment for their future is India’s top priority. As per the 2021 BankBazaar Aspiration Index survey, saving and investing for one’s children’s education was ranked the most important of 21 goals by respondents from around India.

Education costs are rising each year. Families don’t shy away from cutting costs to secure the future of their children. However, many parents make some common mistakes while planning investment for their children, which, unfortunately, leads to poor results. And when results are not as expected, producing the funds for the child’s education becomes tougher.

Here are five common mistakes parents should avoid while investing for their kids:

1. Ignoring Inflation

The cost of education worries all parents. But what is more worrisome is the fact that while investing for kids’ education parents either inadvertently ignore the factor of inflation or underestimate its destructive nature when it comes to future costs. One needs to understand that inflation, in simple words, is the depreciation in value of money. It essentially means that if the cost of higher education is, say, Rs 10 lakh currently, it will not remain the same when your children are old enough to go for the same education 10-15 years down the line.

It’s always advisable to take a minimum inflation rate of 5% per annum while calculating the cost of education. For instance, if the current cost is Rs 10 lakh, the cost will rise to Rs 21.07 lakh 15 years hence. With a calculated estimate beforehand, which is nothing but your financial goal for children’s education, parents can decide upon what proportionate amount to be invested on a regular basis so that the investment value reaches the estimates.

2. Delaying Investment Decisions

Second most common mistake is delay in investment decisions. Remember, the more the delay, the poorer the returns as you get fewer years of investment and thus lose out on the powers of compounding in a shorter duration. In fact, once you get to know you are going to be parents soon, your investment planning should start, i.e., if you can’t start planning sooner than that. For instance, if you start putting in Rs 10,000 per month via SIP, say, in an equity mutual fund when your kid is just born, you will have an investment value of nearly Rs 1.33 crore when your kid turns 20, taking a long-term compounding annual return of 15%. However, if you start the same investment when your kid turns 5 years or 10 years, your investment value will sharply fall to Rs 61.73 lakh and Rs 26.34 lakh, respectively, when your kid turns 20 years of age. In short, any delay eats away your return.

3. Not Diversifying Investment

Concentration of investment in one particular asset class could prove disastrous in the long term. It’s often seen that parents rely too much on a single asset class for investment meant for children — be it in bank fixed deposits, shares, unit-linked insurance plans, debt mutual funds, equity mutual funds and property, among others. This way their investment gets concentrated in one asset class. This not only increases the risk attached to investments but may result in poor returns, no matter how long your investment horizon is.

Diversification is the key to have a steady long-term return. Since investment planning for children comfortably gives parents an investment horizon of 15-20 years, which is quite a long term, families should make such an investment portfolio wherein equity-related instruments should corner not less than 60-65% of the investment. The rest 35-40% should find a place in debt, property or even gold. By doing this, you are most likely not to get any knee-jerk reaction at any point of time as your investment portfolio is fairly diversified and balanced.

4. Taking No Insurance Plan

While investing for children is a great thing, parents should also take care of any such eventualities which can put the investment plan in jeopardy. Parents should consider insurance cover for the entire family by way of family medical insurance and term insurance. An event of a medical emergency can potentially dent your savings heavily and force you to alter or stop your investment plan for children midway. Medical insurance effectively covering your entire family can save your hard-earned money during an unfortunate health situation. Similarly, a proper term insurance will not derail investment plans for children in an event of the demise of a parent.

5. Diverting Funds For Some Other Goals or Sudden Needs

One common mistake by parents is deviating from the financial goal. It is quite common to see that investors use the investment made for a certain goal to fulfil some other goal or divert the funds. This is common human behaviour. Consider not touching investments meant for children for meeting some other sudden needs. Such diversions will hurt the achievement of your financial goal, which in this case is the education of your children. In such circumstances, it is worth reminding ourselves that priorities matter. And certainly investments for children cannot be of lesser priority than any other financial goals.

(The writer is CEO, BankBazaar.com)

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