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Dec 27, 2019 | Source: AxisDirect-O-Nomics
The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.
The joy of being a parent cannot possibly be described in words. From the time that you hold your little bundle of joy in your hands, your life takes a wonderful 360 degree turn. Your child becomes the center of your world and all your energies are focused on protecting and providing for her/him. Building a secured financial future for your child becomes your top priority in order to take care of all her/his needs. To ensure that you have enough financial resources for letting your child pursue her/his dreams and goals, it becomes imperative that you manage your finances well.
With rising cost of living, investing in simple saving instruments such as FDs and saving accounts alone will not be sufficient for you to accumulate a healthy corpus of funds. You need to look at expanding your investment portfolio and include investment options that will help you register capital growth and build long-term wealth. It is generally recommended that at least 80% of funds must be invested in growth assets when planning long-term investments. However, given the plethora of investment options available, selecting the right investment avenue might be a challenge. To help you in the process, below are few options that you must consider as you invest for your child’s future:
1. Equities
With all the positive news about Indian economy marching ahead on the growth path, it would be a wise decision for parents to allocate some amount of their investment to equities. Equities generally are expected to give 4-5% returns over the nominal GDP growth and historically have offered long-term compounded annual growth rate (CAGR) of 15-16% over 15-20 year time period, which is about the same time frame as you would consider while investing for future needs of your children. Assuming 15% CAGR, a sum of Rs 1 lakh invested in equities, would grow to around Rs 4.04 lakh lakh in 10 years compared to Rs 1.96 lakh if you save the same amount in a FD at the current interest rate of 7%. This shows that investing in equities is any day a better proposition.
However, investing in equities is not simple as it does not offer secular returns which one generally gets from FDs. Doing a thorough research before investing and considering a long-time frame are the basic prerequisites for making such returns through equities. Though you may hear conflicting opinions about long-term investing in India, just remember that shares worth Rs 1 lakh in Infosys bought 10 years back would have given you a sum of around Rs 6 lakh today which is far better than what you would have received through FD investment. To make the most of this growth assets, you can seek help from professional financial experts to have just the right percentage of equities in your portfolio as per your risk-appetite. If you are unsure about investing in equities directly, you can adopt the mutual funds route too.
2. Equity Mutual Funds
Equity mutual funds offer you the benefit of capital appreciation at relatively lower risk by diversifying your investment in various companies. By investing in equity funds through the SIP route, you can accumulate a healthy sum without much monthly burden on your pocket. A monthly SIP of Rs 5,000 in equity mutual funds for 10 years can fetch you Rs 11.6 lakh, assuming a return of 12% per annum. Even considering an inflation of 6% per annum, this amount would more than beat the returns offered by FDs which generally provide real return of around 2% (real return = nominal return - inflation). You can also explore this option from tax planning perspective. Investment in equity mutual funds for more than one year are exempted from capital gain tax on their redemption. Similarly, you can avail income tax exemptions under section 80C by investing in Equity Linked Savings Scheme (ELSS) which gives 30% tax exemption under section 80C on the sum invested with lock-in of 3 years.
3. E Gold or Gold ETFs
All important celebrations in India, be it weddings or festivals, are marked with buying and gifting of gold. As a parent, while you might want to invest in gold for such events, think of holding this precious metal in the Electronic form or ETFs rather than in physical form. Investment is E-gold and ETFs do not entail concerns of theft and additional costs such as locker charges for secured storage and making charges. As these options can be purchased in small quantities, you can plan the investments as per your future requirements. It is advisable to make short to medium-term investment in this asset class, as long-term returns on the yellow metal are relatively poor. Gold is no more than a hedge against geo-political tensions or inflation in developed countries and hence is not a recommended option for long-term investment. Unlike equities which offer dividend and capital appreciation, gold is not a productive asset. Prepare for all important occasions in your child’s life by allocating around 5-10 % of your investible funds to this option.
4. Debt instruments
All financial requirements would not materialize in the long-term. Certain expenses, like healthcare, school fees, holidays, would occur in short term and in some cases on recurring basis. To meet such requirements, investing in equities would not be advisable. You may look at debt mutual fund schemes, which are not only liquid in nature but also gives decent returns. You can opt for SIP in the debt mutual fund to build a corpus for short term contingencies. These funds generally offer around 7-8% along with tax benefits in some cases.
5. Tax-free options
Options such as PPF and Sukanya Samriddhi Scheme for girl child offer interest in the range of 7-9% and are exempt from tax deductions under section 80C. Depending on your foreseeable financial expenses, you can decide the time horizon for investment in these securities.
While above instruments will help you prepare financially to fulfil the needs of your child, do not undermine the importance of having a term-life insurance for yourself. This will ensure that your children will be financially secured in case of any unforeseen event. Start investing early to amass large wealth in long-term without incurring a significant outflow of funds on monthly basis. With the magic of compounding and proper planning you will definitely be able to gift a financial secured future to your beloved children.
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AxisDirect-O-Nomics