Things to keep in mind while investing for your child’s future

Education can give your child the wings to soar towards their dreams. But since quality education comes along with a hefty price tag, it is wise to look at investing for accumulating the needed funds. If you too want to leverage investments to shape your little one’s future, here are a few things that you must keep in mind:

• Start investing early through SIPs

As is the case with any investment, starting early is the key here as well. Ideally, you should start as soon as your child is born; if not, then by the time they start going to school. By doing so, you allow compounding to work its magic. You not only earn returns on the principal amount but also on the returns that keep getting added to your original investment. Thus, the power of compounding can help you turn even a small figure into a large sum over a long period of time, provided you start early and invest regularly.

Systematic Investment Plans (SIPs) can make your task easier in this regard because an SIP will help invest at a regular pace and in much smaller amounts, even as low as Rs 500. Moreover, you can ensure regularity in investments because a fixed amount gets deducted from your bank account automatically at predetermined intervals. SIP investment also offer the advantage of rupee cost averaging. This means your cost of investment gets averaged out over a period of time. Thus, you can save for your kid slowly and steadily through SIPs.

• Set clearly defined goals

Merely knowing that you want to save for your child’s future is not enough. You must have a specific goal in mind that is not just realistic but also measurable. For example, if you want to save for their Ivy League education, you must first ascertain the total cost involved so that you are better able to choose a suitable mutual fund and also mark your progress. You must also have an idea of the time left until the milestone is reached. This helps you fix your investment tenure.

Another important aspect to consider is your risk appetite so that asset allocation becomes easier for you. Different mutual funds have different risk-return profiles. For instance, equity funds may be volatile in the short run, but they may also be ideal for building wealth in the long run because of their return-generating potential. Similarly, debt funds may be considered if the time period to reach the target amount is short. This is because debt mutual funds generally tend to be less risky in the short-term and aim at capital protection. Your portfolio can be a mix of debt, equity, hybrid mutual funds, depending on the investment horizon, risk appetite and goal.

• Have a diversified investment portfolio

Investments may be characterised by uncertainties or risks. But these associated risks can be managed through diversification. When you are not too dependent on a single investment, you can be much more stress-free about your child’s financial security. You know that even if your equity funds are subject to volatility, you can protect your capital with debt funds. Also, if debt funds are not generating enough, you can count on your long-term equity investments for creating wealth. Thus, a diversified portfolio helps you continue moving towards your goal while balancing risk and returns. Mutual funds provide a diverse range of products ranging across asset classes, market capitalisations, risk profiles, themes, geographies, among others.

• Do not ignore inflation and taxes

While investing for your child’s secure future, it is important to consider taxation and inflation as they may impact the value of your investments at the time of redemption or withdrawal and you may end up falling short of your target amount.

• Review and rebalance your portfolio periodically

Portfolio reviews become a must-do because your asset allocation may change course along the way. You must, thus, keep track of your investments, and if need be, rebalance the asset allocation to stay in line with your goals to ensure your kid’s happiness.

As a parent, you want to be there for your child not just emotionally and physically but also financially. Mindful mutual fund investments can help you grow your money so that, in turn, you can provide for your child’s growing needs.