By K P Venkataramakrishnan, Director, Viruksham Finmart Pvt Ltd
One of the major financial goal of any parent is ensure that the child is supported financially till he/she has found a steady anchor in a job. Up to this point, a parent has to plan for all type of expenses which comes attached to education whether domestic or overseas. At a time when education inflation is steadily upwards of 10%, it becomes very important for a parent to plan for children's financial goals. This is where children focused mutual funds come into play.
These funds are designed to meet a child's various financial goals. Typically, there are hybrid funds in nature with the investments spread across equity and debt asset classes. They offer diversified and growth-oriented investment options for parents seeking to secure their children's financial future. This approach ensures that the fund grows with time as the kids do, thereby securing their education, investing in their dreams, and paving the way for a brighter tomorrow.
Investing in mutual funds for children can offer several benefits. Here are some
Potential Advantages
Flexibility: Mutual funds offer a variety of options catering to different risk profiles. Investors can choose funds based on their risk tolerance, financial goals, and investment horizon, providing flexibility to tailor the investment strategy to individual needs.
Liquidity: Mutual funds are generally liquid investments, allowing investors to redeem their units and access their funds when needed. This liquidity can be beneficial for meeting unexpected financial requirements or seizing other investment opportunities.
Protection Against Inflation: Mutual funds, especially those with exposure to equities, have the potential to outpace inflation. This is crucial for preserving the purchasing power of the invested capital over the long term.
Long-Term Growth Potential: The extended investment horizon for children allows for compounding of returns for over a decade. Compounding is the process where investment earnings generate additional earnings, leading to accelerated growth over time.
Diversification: Mutual funds pool money from multiple investors to create a diversified portfolio of assets. Diversification helps mitigate risk because it spreads investments across various securities and sectors. Even if one investment performs poorly, the impact on the overall portfolio remains minimal.
Professional Management: Skilled fund managers make investment decisions based on thorough research and analysis. Their expertise proves to be a valuable resource when it comes to navigating financial markets and its complexities in order to optimize returns.
Automatic Reinvestment: Dividends and capital gains earned from mutual funds can be automatically reinvested, compounding the returns over time. This automatic reinvestment feature contributes to the overall growth of the investment.
Tax Efficiency: Mutual fund tend to tax efficient among the various investment options one has. Any capital gain/loss tax liability triggers only on sale of mutual fund units. Consulting with a tax advisor is crucial to understanding and optimizing the tax implications of an investment.
Systematic Investment Plan (SIP): SIP enable regular and disciplined investment, irrespective of market conditions. Investing a fixed amount at regular intervals ensures that more units are bought when prices are low and fewer units are bought when the prices are high, thereby aiding in lowering the average cost of investment over the long term.
Impact on Children
Involving children in discussions about investments and financial planning provides them with valuable education about money management. Investing for children provides an opportunity to teach financial discipline and responsibility. It helps children understand the concept of delayed gratification, setting financial goals, and working towards achieving them.
Some investment platforms offer custodial accounts for minors, managed by parents or guardians. These accounts provide a structured way to save and invest for a child's future, with control transitioning to the child when they reach a certain age.
To conclude, education and related expenses in India are growing at a rapid pace and it is important that parents stay ahead of the inflation menace when it comes to meeting the dreams of their kids. The earlier one starts to park away funds to create a corpus better will be the final outcome. Don’t delay the investment in the hope of putting aside a larger chunk of money at a future date. Instead start today even though the amount may be as low as Rs. 500.