BEWARE OF PITFALLS IN INVESTING FOR CHILD'S FUTURE

PITFALLS IN INVESTING FOR CHILD’S FUTURE

1. Debt investments
·        Investing for children means you want to save for the long term and create a corpus for foreseeable expenses like higher education and marriage.
·        Guaranteed fixed income products like fixed deposits, post office schemes, etc., though considered safe, would not be able to beat inflation in education costs and would lead to an inadequate corpus to meet the actual cost.
·        Hence, parents should not park all the money set aside for their child’s future in fixed income instruments.
·        They should consider investing in equity mutual funds which would potentially give the best inflation-adjusted return over the long term of 10-15 years.

2. Short-term products
·        Many parents just park the money they save for their children in short-term fixed deposits.
·        Since their goal is 10-15 years away, investing in them would not yield the desired results.
·        They would need to be re-invested every time on maturity at the prevailing rate, which may not be very attractive.

3. Early redemption
·        Parents should avoid timing the market and invest in a disciplined manner for their goal.

·        Early redemption from equity to invest in bonds in short-term volatility should be avoided.

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Rebalancing their portfolio, based on changing needs or situations, should of course be done on a regular basis.

 4. Attraction to gold
·        Many parents invest a majority of their savings for their children in gold for their marriage.
·        However, gold in the marriage would constitute only 20-25% of the overall spending.
·        Therefore, savings for the child’s marriage should be among various investment classes.
·        Investing in gold should not be more than 10-20% of the overall portfolio.

5. Attraction to child insurance policies
·        Child insurance policies are nothing but renamed endowment, money back or Ulip policies.
·        They carry high costs and lean towards highly conservative investments.
·        They, therefore, provide very low returns that are unable to beat the rising cost of education.
·        Their promised returns may only end up denting your child’s education plans.