Plan for your child's future

Plan for your child's future

27 Jan, 2008, 0050 hrs IST,SRIKALA BHASHYAM, TNN

When it comes to children, parents turn generous. In most cases, asset allocation is not an issue as every parent makes it a point to set aside a corpus for the child's future.

A few years ago, the parents of girl children made a conscious effort to get into the saving mood as the corpus for the marriage was considered a long-term goal. Today, planning for the child's future has taken a different meaning as parents are increasingly setting aside money for their child's education.

With the cost of education expenses galloping at a faster pace, it has become a necessity for parents to think of a savings plan for their children at the earliest.

Earlier the better. This is one dictum which holds well whether you think of retirement planning or investing for children. Needless to add, the more period you have on hand, bigger can the corpus get. Ideally, think of saving for the child immediately after birth simply because you will be faced with huge expenses at regular intervals.

Experience has shown that those who get into the saving mood at a child's birth end up as more disciplined parents. Also, it helps them to start with a small sum.

Those looking at funding a children's education through investments need to look at the cost in a staggered way.

The education cost for a parent can be divided into 3-4 phases. It first comes when the child is around 3-4 years old and is ready for schooling. Investment for this is possible only when a parent starts saving even before the child completes one year.

The next big bill arrives when the child is 18 and is ready for an entry into professional education. After a gap of three years, parents in most cases, have to prepare for an investment which depends on various other factors such as choice of educational course, location etc.

While setting aside a portion of earnings on a monthly basis is one of the options, it is definitely not an efficient method as savings bank offers a paltry interest of 3.5 per cent, and is well below the rate of inflation. Hence, one needs to look at different products.

The most popular option for children's education has been insurance but it need not be the only option. The advantage with insurance is that it offers protection to the child even in the event of the death of the parent.

Since insurance companies allow investment options through their unit-linked plans, it offers the added advantage of cover and investment. In fact, it may not be a bad idea for every parent to look at the option of a child insurance plan at an early age.

While insurance can be a long-term option, mutual funds too offer the advantage of long-term capital appreciation for parents. One of the best options would be the systematic investment plan (SIP) in equity funds as they allow investment growth over the long term. The choice of fund could be a combination of aggressive and diversified funds with a time horizon of 10-15 years.

Mutual funds also offer dedicated children's products which also carry a lower entry load. The fact that the parent cannot withdraw these plans before the child's age of 18, allows them to build a corpus over the long term.