Start a SIP Today
Every parent aspires to give quality education to their children, but what stops them is ever increasing cost of education. Over the years, the inflation rate of primary and secondary education has increased by 12%, while for the higher education, it has been between 16%-20%. Among the financial instruments, equities have a track record of delivering higher returns compared to other asset classes, in the long run. An equity oriented mutual fund would be suitable for this goal and there are schemes that have been designed for planning children’s future.
Ideally parent should start a SIP (Systematic Investment Plan) in the name of the child. SIP in mutual funds is the best way of investing in equity market, as they play in favor of value investing in both bull and bear markets, with compounding and cost averaging, respectively. This is an investment method in which investors choose to invest a fixed sum every month on a per-selected date in a mutual fund scheme, and to reach the goal , there is a per-defined period, which ideally should align with number of years. Since investment happens every month, it eliminates the risk of timing the market. When the price of the selected mutual fund unit, technically called as Net Asset Value (NAV), goes down due to the drop-in market value of portfolio, investor can buy more units. When the price (Net Asset Value) goes up, investor buys lesser units, thereby achieving a better Average Purchase Price over the investment tenure. When the portfolio appreciates in the long term reflecting the broader markets and economy, as it did in the past, compounding helps in delivering higher returns on all units accumulated.
ABOUT CHILDREN GIFT PLANS
There are few schemes dedicated to children, which parents could use as a meaningful gift for securing their child’s financial future. They invest the corpus in equity oriented instruments, hence are subject to intermittent market volatility. If one is confident about the markets and the fund’s performance, he or she can go for a bulk investment, else simply choose the way of SIP. They come with ‘lock-in’ and ‘without lock-in’ options. Lock-in period is until the unit holder, here the child, attains 18 years of age or 3 years from allotment, whichever is later. We suggest parent to opt for the lock-in option as it helps in keeping the goal on track and avoids any deviation.
MISTAKES MADE BY PARENTS
There are some mistakes that parents usually make while investing for their children’s education.
First of all, majority of the parents make a delayed start in investing. A late beginning definitely impacts the maturity value, compounding effect on investments and capital appreciation. Parents can prepare themselves to meet the cost of their child’s higher education by setting aside a sum every month, start investing early and invest it regularly. Secondly, parents often opt for a conservative estimate while calculating the future cost of education. Assumption of relevant inflationary rate prevailing in education sector is important. We suggest to include the cost of accommodation and food. Lack of information could be a reason for such estimates and some enquirers can help to make a refined plan. Ideally, parents who are keen to send their children abroad for education should plan to cover the future cost of education suitably. What’s more, they should calculate the probable future cost involving food, accommodation and living expenses in the desired destination, keeping in mind the exchange rate/currency fluctuations (for example, a USD 10000 would cost Rs 6,00,000 if INR is at 60 and Rs 7,00,000 if INR is at 70).
There is a tendency among parents of keeping their children in isolation about the investments. But, at a certain age, it’s good to responsibly empower them with the investment information. This way, children will also understand the parent’s hard work and planning. It acts as a strong inspiration for them
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