Source: The Economic Times.
Investing for children - like bringing them up - is not easy. To begin with, there is the challenging task of figuring out the amount that will be required many years down the line. Once this is done and a reasonable estimate is at hand, begins the equally arduous task of identifying the right investment products. Here are a few points you can consider before investing for your tiny tot.
- Estimating requirements: Investment for children is primarily done to meet two major future expense heads - education and marriage. Advisors assume inflation numbers for each of these heads in order to calculate the likely future expenses. The purpose of an investment strategy then is to target investments - taking into account amounts available for investment each year and the risktaking ability so as to meet those targeted expenditures.
- Equities a good idea: Much of the advice related to investment for children is centred around equity with most financial planners recommending systematic investment in a suitable investment product. The case for equities is strong. By now, it has been adequately proven that equities outperform other asset classes over the long term. It is also very well established that investment in stocks, over a sufficiently long period of time, also irons out the volatility associated with this asset class. One leading fund for instance, with a track record of more than 14 years, has turned in a compounded annual growth rate of almost 29% per annum. What this means is that a sum of Rs 1,000 invested for your tiny tot invested then, would have grown to over Rs 35,000 by now. This indeed is a compelling case for this form of investment.
- Take care of tax provisions: Identifying investment products and calculating target amounts can seem easy in front of deciphering the provisions of the Income Tax Act. While there are various alternatives, right from mutual funds to real estate to precious metals available to generate wealth for your junior, it would be smart to consult your tax advisor as to the impact such investment can have on your own tax liability. The Act's clubbing of income provisions can create immense financial trouble. Investments have to be structured smartly so as to ensure that post-tax returns are adequate to meet the required target amount.
- Traditional products can help: Equities are excellent, but considering how critical some needs such as education can be, it pays to have at least one assured return product in the portfolio too or a product with predictable cash flow. An insurance policy, for instance, which promises to pay a sum assured after a given period of time immediately meets a part of the target amount and is predictable. Insurance companies offer a large number of products that offer cash flow at specific intervals to meet the typical financial needs of education. Another way of getting predictable returns to meet the targeted amount required is to look at post office saving instruments or fixed deposits. But, you need to figure out with your financial planner or yourself as to the proportion of money you would devote to such assets and how that will impact your ability to reach the targeted amount with the limited resources you have.
Post a Comment