Small but regular investments in mutual funds via the SIP route can help you build a large corpus over time for your child's future. But many parents often wonder what is the value of Rs 500 or Rs 1000 a month today if expenses are in lakhs or even crores (foreign education cost). To clear your head of such notions, you only have to look at the average weight of a child in your arms during birth and compare to what they weigh in adulthood.
A typical child weighs a precious 2-3 kgs when you first hold her/him at the hospital. And as they grow and mature, they rival their parents in weight during adulthood. This is the power of small but assured steps. Just like nutrition, securing your child's future will require small but regular investments. The rest is best left to the power of compounding that will ensure robust growth of the corpus to a handsome size a few years down the line.
Parent Power
Becoming a parent is a joyful and fulfilling experience. But, the title of mumma or papa does come with a lot of responsibilities. It is your sacred duty to not just attend to the needs of your child/children, but also make a foolproof plan for their bright future. And, in today's inflationary times, things are just getting costlier. The country's retail inflation, which is measured by the consumer price index (CPI), accelerated to 6.5 per cent in January 2023. School-related expenses are accelerating, putting a strain on parents' finances. Even in such a scenario, dutiful parents know they have to execute a good saving and investment plan for their child's needs.
Planning for a child's future starts with listing the different financial goals, such as a child's higher education and wedding estimated expenses. Use financial calculators that show inflation adjusted answers. But, remember if a wedding costs a sum of Rs X, it will surely cost more than Rs X a few years later. For instance, if you will need Rs 10 lakh for child's education today, in 10 years the amount required will be over Rs 21.60 lakh if education cost appreciates by 8 per cent per annum. Truth is inflation in education costs is often much higher. If you are not big on math, then seek the help of a financial advisor who will tell you the estimated amounts required for each goal.
Reaching the Goals
Systematic Investment Plans of mutual funds are an ideal way for parents to start investing for their child's future goals. Rarely will you have a big enough lumpsum amount in today's rupee terms that can grow to desired level in the next two decades. Instead, SIP allows you to invest small sums every month and grow these at a desirable rate i.e. more than the pace of inflation. Hence, periodic investments are the best choice for most parents.
When you make periodic investments in a mutual fund over time to build a corpus, you are following a systematic investment plan to reach the target in a few years. It's very simple but an extremely effective route. Mutual funds are of different hues and shapes. But understand that equities are known for giving inflation-beating returns. Hence, if your child's goal requirements are 10 or more years away, go for SIP in equity mutual funds as they will be a smart way to build a corpus for your child. Choose SIP in diversified equity funds for a child's goals.
Income boost, child plans
As the income levels of parents’ rise, you should boost SIP investments too. These are not impossible because wage hikes in India are often in double-digit percentages or people switch jobs to get better salaries. So, assume 10 per cent increase every year in your monthly SIP of Rs 10,000, and after 15 years, a parent could have built a corpus of over Rs 70 lakh and over Rs 80 lakh at 10 per cent and 12 per cent SIP return p.a. respectively.
If you think you need special focus to secure the future of our loved ones by having a dedicated investment in their name, consider children-oriented mutual funds. SIP in such funds offer you plans with a different mix of equity and debt to suit your investing objectives. Such offerings come with a lock-in period of 5 years (or till they attain age of majority) so that parents are committed to the goal of building capital for their child.