Hi,

 This is a simple article about future planning for kids.

Investment is Equities for the long term is the best option as per as our long term goals are concerned such as Daughter’s marriage, Son education in top notch foreign universities.

 However, in case a couple is looking for such a big time horizon (more than 15 years), risk tolerance should cover all other variables.

 Every parent thinking of fulfilling all the requirements and desires of their kids. All of them want to give the best to their wiz kids. Best of education, best of toys, best of health, best of everything which makes them happy! The only problem with these best things is that these have the best price tags too.

 Let’s take education as a case. After paying Rs. 2,000 to Rs. 5,000 per month in play school, a father takes his kid to the best private school in town. This school makes him forcefully pay huge sums of donitions, though donations were meant to be paid willfully. After this donation which runs into a few lakhs of rupees, every month the parent is required to pay tuition fee of his/her kid, which may be again around Rs. 2,000 to Rs. 4,000. And, if the parents have chosen an air-conditioned, well-built school with all upgraded infrastructure facilities, then the monthly outgo maybe around Rs. 7,000. But what can a father do, after all it is about the child’s future. Or maybe something could have been done. Some financial planning and some investment based on such a plan.

 But what is special about investing for kids, one may ask. After all it is just money to be saved and invested. However, investment is not just putting aside some x amount of money in a trading account with a broker and invest in any  security.

 Investment can be said to be a function of purpose, duration and risk tolerance. Let us put this in perspective with investment for children.

 The purpose for kids could be – secondary education, higher studies (in India or abroad), marriage, house, other facilities like car, etc. So one has to enumerate what all is required to be catered to. Each of these items has a cost – some cost many more times than others. Take higher studies for instance. A decent coaching institute may charge anywhere between Rs. 1-2 lakhs for an IIT JEE exam. A good, solid car may cost Rs. 5  to 7 lakhs. Providing a house is another challenge in itself with housing prices still in the high bracket, especially in metros like Mumbai, Delhi, Bangalore, Hyderabad so on. A simple 3 BHK flat in a decent locality now is a matter of about Rs. 50 – 90 lakhs. But these are current cost estimates. Imagine what these figures will grow into when inflation is factored into them for that many years. Going by our above estimate for cost of car of Rs. 5 lacs and inflation estimate of 5%, the cost after 25 years stands at Rs. 16.93 lakhs. By now, one must have figured out that it is not a cake walk serving for such needs.

For the basic reason – magic of compounding. Think of a parent who started planning for their kid even before it was born and begun investing when the little one arrived. They had a pretty long time (about 18 years for tackling expenses in higher studies, a wedding marriage and a house). With such a long period one can think of a more equity skewed portfolio. Even though this couple is likely to face some black years like 2008, they can still work out a decent net worth at the end of 18 or 25 years. Imagine the bulk of monies they can save. For instance, if the couple save around Rs. 40,000 a year for their nestling, in 25 years they would end up with around Rs. 34 lakhs, taking into account only an annual return of a meager 9%. Reality maybe something much better if the risks they took with equities did well in the long run. That brings us to the last factor to consider – risk tolerance. This is what varies with one’s portfolio duration, value, liabilities and return expectations. However, in case a couple is looking for such a big time horizon (more than 15 years), risk tolerance should cover all other variables. Equity investments, as shown by countless researches, are best suited for long-term investment durations.

Based on the above analysis one may look at various financial products available in the market. Looking at investments options that provide more exposure to equity is something one should definitely opt for to garner high returns. For passive investors, those who view stock symbols like chemical formula, perhaps investing directly in equity mutual funds, exchange traded funds (these replicate the performance of an index) could be a preferred option. Also to reap the benefits of tax allowance on investments and their disposal, one can allocate some amount to products like Public Provident Fund, NSC etc.

As a matter of prudence one might think of withdrawing investments from risky products to safe ones, just before the requirements arise. Say, disposing off the equity investments just when the junior is 16 or 17 and putting the money in Money Market Mutual funds or debt funds or fixed deposits etc. This practice shall definitely bring the return during such period down but can assure reasonable safety of principal towards the end of the investment period, when you need to access the money.

Wish you all the best for bright future of our kids