Guide To Parents: Investment Planning For the Safe Future of Children
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COVID-19 and other economic complexities have left inflation and the economy at a place where we have all been forced to re-think the way we look at our financial journeys. Necessities such as education, home loans, etc., are becoming increasingly difficult to maintain or even afford, which is why it helps if parents start financial planning as early as they can. Wise investment decisions today can help your children achieve their dreams and help us collectively build a stronger, more capable India. Let’s take a look now at key investment strategies and themes that can help you save for your child’s bright future.
Be aware of the cost of professional courses and certifications
Whether your child wants to be a doctor, a journalist, an engineer, or an investment manager, professional qualifications are needed. However, in a country like India, with a rapidly growing population of young people, competition for the limited number of seats for professional courses is intense. This means that the cost of education, and supplementary costs like tuition, will likely be more than today. Over the past 5-10 years, costs in the higher education sector have ballooned by double-digit figures. Right now, MBA fees, for instance, can be as high as INR 20-40 lakh for a two-year program. We don’t expect this trend to reverse itself in the near future, meaning that quality education 10 years down the line will be a substantially costlier proposition than it is right now.
When preparing your investment strategy, it’s critical that you have an awareness of the current and projected costs of professional courses and certifications. That way, you will be able to afford a quality higher education experience for your child, when the time comes.
Monitor the medium to long-term inflation rate
High levels of inflation limit the utility of the gains you make from strategic investments. Over the past two decades, inflation rates have fluctuated dramatically, year-on-year, with a high of 12.3 per cent in 2008, and a low of 3.3 per cent last year. What does this entail when it comes to investing in your child’s future? Conventional assets might not generate a sufficient amount of interest to offset the rate of inflation in the long term. This means that you will want to rethink your risk appetite and incorporate a larger proportion of higher-return products into your portfolio. While this does have implications in terms of overall risk, high returns are the only way to combat a sustained, high level of inflation. Low returns from conventional assets could, in the long term, effectively erode the value of your savings.
What does your cash surplus look like?
On a given month, and across a given year, what does your cash surplus look like? Once you’ve accounted for expenses and discretionary spending, how much cash is left for savings and what are the long-term trends you’ve seen with regards to this amount? Having an adequate monthly and yearly cash surplus is critical to your long-term investment plan for your child’s future. You need to evaluate your current cash surplus situation to identify whether or not it aligns with your investment goals. If your plan is to save a certain amount every month, does your cash surplus actually allow you to do so? If not, you’ll want to take a look at your discretionary spending and pare things down to enable a greater, sustained cash surplus on a month-to-month basis.
What investment vehicles are available and how do you allocate your investments?
In these times of change and greater uncertainty, it’s important to be aware of all the potential investment vehicles available, as well as their ups and downsides. You also want to strategically allocate your investment between different vehicles to minimize risk and meet your target in terms of returns. Fixed deposits, bonds, mutual funds and even exotic instruments like crypto all have different plus and make sense in different contexts. For instance, investing a large proportion of your savings towards an FD will ensure stability. However, higher levels of inflation might mean that the actual value of your investment will either stagnate or even come down slightly over time. In general, FD rates of return range between 3.5 per cent and 7 per cent in India. Looking at historical inflation trends, a lower rate of return would cause your savings to erode in value. Other vehicles come with higher levels of return, but are accompanied by increased risk. You’ll need to sit with your financial advisor and draw up a plan that aligns your investments with your target return for enabling your child’s future.
Conclusion: Plan, monitor, and review your investment
Investing towards your child’s future isn’t a ‘fire-and-forget’ decision. You need to carefully plan your investment strategy, monitor its success and periodically iterate and realign to ensure long-term success. You need to take into account changes in the market and overall economy, as well as personal changes—as they grow older, your child’s interests may change, along with their higher education prospects. The best way to plan and follow through on your investment is to work closely with your financial advisor. Set a plan in action, identify long-term goals, then review the state of your investment on a regular basis with your advisor, allowing for changes, both in terms of allocation, and in terms of what you’re putting in each month. Your child’s future matters. Saving to make their dreams come true can be the greatest gift you can give. But in a volatile economy and environment, it’s important to do this strategically.