A baby brings in several new expenses today and in the future. It is important that you start investing immediately to maximize your returns. When your child is younger, you have a long time to accumulate a good corpus that may be used for his/her higher education. Here are two reasons why investing early for your child is beneficial.
1. Power of compounding
When you invest your money, it earns certain returns. By compounding these returns further, earn additional income. As a result, you are able to accumulate wealth and build a good corpus over the long-term.
2. Lower stress
If you start investments for your child as soon as he/she is born, you will need to invest a lower amount. As your child grows older, you have lesser time to accumulate the amount needed for his/her further studies. Therefore, you will have to invest a higher monthly amount to ensure you have adequate funds. This may result in some financial stress, which is easily avoidable by starting early.
Financial planning is important to ensure you have sufficient funds to take care of your child’s future. If you failed to start planning when your child was born, it is still not too late. Here are different strategies you may use for your child’s secure financial future.
1. Equity-oriented portfolio
If your child is three to four years old, consider investing in equity and related financial products. The returns on equities may not be guaranteed due to market fluctuations and volatility. However, when your child is younger, you may assume a higher risk through equity investing. Historically, equities have delivered the highest returns amongst all asset classes in the long-term. You may also invest in mutual fund equity schemes through Systematic Investment Plans (SIPs). This reduces your risk of direct equity investing while giving you the opportunity to earn higher returns.
2. Balanced portfolio
When your child is older, you may have only five to nine years to save and build a decent corpus for his/her education. Therefore, you have to reduce your risk while achieving balanced growth. Distributing your investments equally among equity and debt may be a suitable option.
You may opt to invest in mutual funds through balanced schemes that invest the fund corpus in debt as well as equity instruments. If you want to further reduce your risks, you may consider monthly income plans (MIPs) offered by asset management companies (AMCs). Such funds limit the equity exposure of the fund corpus to an approximate rate of 15% to 20%. However, the returns on MIPs are lower when compared to other types of mutual funds.
To include debt in your portfolio, you may commence a recurring deposit (RD) with a maturity date around when your child starts college. However, if you are in the highest tax bracket, consider an SIP in short-term debt funds for greater tax efficiency.
3. Debt-oriented portfolio
If your child will begin college within one to four years, you should reduce your investment risk. Therefore, building a debt-focused investment portfolio is recommended. It is advisable that you assume only 10% to 15% equity exposure as your child nears college.
This shift from growth to investment protection is crucial to ensure you do not run the risk of losing your entire savings due to unfavorable market movements. A sudden downturn may significantly reduce the value of your investments or may even completely erode its value. Therefore, discontinuing your equity SIPs and shifting towards short-term debt funds is recommended.
Financial planning is not a one-time procedure. You must regularly update and modify your plan to match your changing life situations. Here are two things you must remember.
1. Regularly monitoring
It is important that you regularly monitor and review the status of your investment portfolio. You must make modifications to your holdings as and when required to ensure you stay on track to achieve your goal.
2. Increase investment amount
Just like your income increases each year, increasing your savings and investments over the years is important. This will go a long way in helping you build wealth over the long-term.
Financial planning is not easy. ARQ,the proprietary investment engine in Angel Wealth’s mobile application simplifies this procedure. It uses over a billion data points to match recommendations to your goals and risk profile. A differentiating factor of this investment engine is that all recommendations are machine-oriented and free from any human bias.
Download the Angel Wealth mobile app today and save for your child’s financial future.
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