6 Tips to Secure Your Child’s Financial Future

You live in uncertain times and your child’s future really cannot be compromised. Your primary task is to give them a good quality education and it costs the earth. However, it is not all that difficult if you properly plan for it and save intelligently. Remember, your child’s college and post-graduate education is the biggest and the most significant investment that you need to make during your life time. Planning a secure future for your child is not only about growing your investments or making the corpus ready. It is also about estimating the associated risks and providing for the same. Here are 6 tips on how to secure your child’s financial future.

Education costs escalate much faster than inflation; so plan accordingly

How much did you spend for your own education 20 years back? The amount of money you spent on your entire education is what you may have to spend for your child in a couple of years schooling. An Engineering or MBA degree in a quality institute can set you back by Rs.35-40 lakhs. If you are planning to send your child abroad, it could cost 3-4 times that amount. All this pertains to the current scenario. By the time your child grows up, it could be much bigger. Be liberal in estimating the costs and constantly benchmark.

The golden rule is to start as early as possible

Some of the young professionals these days start saving for their child’s future as soon as they are born; and they are not off the mark. The earlier you start planning for your child’s education and secure future, the longer you can save and invest. That is when the power of compounding kicks in. The longer you invest, the longer your money earns returns and the longer your returns earn further returns. If you want to make your savings count, you need to start really early.

Bonds and debt funds will not help you; equity funds will

Since you have 15-16 years in hand, you can fully leverage the power of equities. Don’t waste your risk taking capacity in liquid and debt funds. If you are planning for your child’s education 15 years down the line then you can afford to leverage (and you must) the power of equities. Over a longer period of time, the biggest risk for you is not taking adequate risk. Equities can be your route to wealth to plan for your child’s financial future.

Phase your investments; even if you have lump sum inflows

Ensure that you adopt a phased (SIP) approach.  Apart from giving you the benefit of Rupee Cost Averaging, SIP approach synchronizes your investment outflows with your inflows. That reduces the pressure on your finances. Check the table below!

Planning for your child’s education corpus of Rs.1 crore in 2033
SIP Starts in	2018	2020	2022	2024	2026
SIP on	Equity Funds	Equity Funds	Equity Funds	Equity Funds	Equity Funds
Target in 2033	Rs.1 crore	Rs.1 crore	Rs.1 crore	Rs.1 crore	Rs.1 crore
Tenure	15 years	13 years	11 years	9 years	7 years
Annual Yield	15%	15%	15%	15%	15%
Monthly SIP	Rs.16,224/-	Rs.22,472/-	Rs.31,703/-	Rs.45,988/-	Rs.69,754/-

There are two clear messages here. Firstly, to plan a secure future for your child you need to opt for systematic investing in equities and you need to start early. There is also a second aspect to it. Even if you get intermittent lump sum flows, you can convert these into SIP structures by opting for systematic transfer plans (STP). That way you also get the benefit of rupee cost averaging. Most important, don’t forget to shift to liquid ahead of milestones.

Your child plan is incomplete without insurance built into it

What if a calamity was to befall you, God forbid, in between? How to keep the child’s plan unaffected? There are 2 options. You can opt for a specialized child education plan offered by mutual funds which includes an insurance component also. If something happens to the parent, the child plan continues without any further contribution. Another option is to take a term plan large enough to cover your child’s future costs. It is more flexible!

More than the plan, monitoring determines its success

The child plan also has to be monitored on a periodic basis. Is the plan on track to meet your goals or have costs gone beyond expectations? Are investments delivering the assumed returns? Based on your review, you need to rebalance the child plan to sync it with the market reality. While review and monitoring has to be periodic, rebalancing must be only need-based.

It is best you use the equity mutual fund SIP route to plan for your child’s future as it makes your money work hardest. Of course, insurance must be embedded in the plan!