Children are the greatest assets of a family. Investment for their future is India’s best priority. As per the 2021 BankBazaar Aspiration Index survey, saving and investing for one’s children’s education was ranked the most crucial of 21 objectives by respondents from about India.
Education expenses are increasing each and every year. Families do not shy away from cutting expenses to safe the future of their children. However, lots of parents make some widespread errors even though organizing investment for their children, which, however, leads to poor outcomes. And when outcomes are not as anticipated, generating the funds for the child’s education becomes tougher.
Here are 5 widespread errors parents ought to stay away from even though investing for their kids:
1. Ignoring Inflation
The price of education worries all parents. But what is more worrisome is the truth that even though investing for kids’ education parents either inadvertently ignore the aspect of inflation or underestimate its destructive nature when it comes to future expenses. One wants to have an understanding of that inflation, in very simple words, is the depreciation in worth of dollars. It basically suggests that if the price of larger education is, say, Rs 10 lakh at the moment, it will not stay the identical when your children are old adequate to go for the identical education 10-15 years down the line.
It’s constantly advisable to take a minimum inflation price of 5% per annum even though calculating the price of education. For instance, if the present price is Rs 10 lakh, the price will rise to Rs 21.07 lakh 15 years therefore. With a calculated estimate beforehand, which is practically nothing but your economic objective for children’s education, parents can determine upon what proportionate quantity to be invested on a typical basis so that the investment worth reaches the estimates.
2. Delaying Investment Decisions
Second most widespread error is delay in investment choices. Remember, the more the delay, the poorer the returns as you get fewer years of investment and therefore drop out on the powers of compounding in a shorter duration. In truth, after you get to know you are going to be parents quickly, your investment organizing ought to start out, i.e., if you cannot start out organizing sooner than that. For instance, if you start out placing in Rs 10,000 per month by means of SIP, say, in an equity mutual fund when your kid is just born, you will have an investment worth of almost Rs 1.33 crore when your kid turns 20, taking a extended-term compounding annual return of 15%. However, if you start out the identical investment when your kid turns 5 years or 10 years, your investment worth will sharply fall to Rs 61.73 lakh and Rs 26.34 lakh, respectively, when your kid turns 20 years of age. In quick, any delay eats away your return.
3. Not Diversifying Investment
Concentration of investment in one certain asset class could prove disastrous in the extended term. It’s usually seen that parents rely as well substantially on a single asset class for investment meant for children — be it in bank fixed deposits, shares, unit-linked insurance coverage plans, debt mutual funds, equity mutual funds and house, amongst other individuals. This way their investment gets concentrated in one asset class. This not only increases the threat attached to investments but could outcome in poor returns, no matter how extended your investment horizon is.
Diversification is the crucial to have a steady extended-term return. Since investment organizing for children comfortably offers parents an investment horizon of 15-20 years, which is fairly a extended term, households ought to make such an investment portfolio wherein equity-connected instruments ought to corner not significantly less than 60-65% of the investment. The rest 35-40% ought to discover a location in debt, house or even gold. By undertaking this, you are most probably not to get any knee-jerk reaction at any point of time as your investment portfolio is pretty diversified and balanced.
4. Taking No Insurance Plan
While investing for children is a fantastic issue, parents ought to also take care of any such eventualities which can place the investment strategy in jeopardy. Parents ought to look at insurance coverage cover for the whole family by way of family health-related insurance coverage and term insurance coverage. An occasion of a health-related emergency can potentially dent your savings heavily and force you to alter or cease your investment strategy for children midway. Medical insurance coverage proficiently covering your whole family can save your difficult-earned dollars for the duration of an unfortunate overall health scenario. Similarly, a correct term insurance coverage will not derail investment plans for children in an occasion of the demise of a parent.
5. Diverting Funds For Some Other Goals or Sudden Needs
One widespread error by parents is deviating from the economic objective. It is fairly widespread to see that investors use the investment made for a particular objective to fulfil some other objective or divert the funds. This is widespread human behaviour. Consider not touching investments meant for children for meeting some other sudden wants. Such diversions will hurt the achievement of your economic objective, which in this case is the education of your children. In such situations, it is worth reminding ourselves that priorities matter. And undoubtedly investments for children can’t be of lesser priority than any other economic objectives.
(The writer is CEO, BankBazaar.com)