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How To Invest For Child? Research Team | Posted On Wednesday, October 07,2015, 10:35 AM

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How To Invest For Child?



The first thought of a newly married couple whose first child is born “I need to provide a good education to my child”. The couple sets its priorities. Save money for the education of the child.

So where do most newly married couples, with a new born invest? A couple saves money and invests this money in a recurring deposit, or rushes to open a public provident fund account in the name of the child. This is a commonly followed practice.

Most couples believe that saving for a child is important, but few pay attention to the growth/increase of this money by investing in the right way.

Now comes the big question….

How does a couple invest for the education of their child?

First let us understand how a couple generally invests for the education/marriage of their child.

Invests in debt: An investment in fixed deposits, PPF or NSC is an investment in debt. The principal invested is safe. Interest is paid on this principal.

Gold: A traditional form of investment where gold jewelry is made and stored for the child’s marriage.

The modern methods….

Child life insurance mainly child endowment and child Ulip plans.

Investing in equity mutual funds and stocks.

How should a couple invest for the education of their child?

Couples generally invest in debt such as a fixed deposit,

PPF or even bonds.

The reason: It is believed that the money invested is safe and earns interest. This money grows with time.

The truth: The money invested grows at the rate of inflation. Inflations eats up the interest you earn. The effect of this is, you earn nothing on the money you invest in debt.

What about equity?

You may invest in equity mutual funds or stocks if you have an appetite for risk. Stocks do give you a dividend, but it is not much. The value of equity mutual funds and stocks appreciates (increases), with time. The returns you get from equity are generally much higher than inflation. However you have to bear a higher risk, as if stock markets crash, you could suffer a heavy loss.

You need to stay invested in equity for the long term, at least 3 years to get the benefits of these investments.

Should you invest in equity to fund your child’s education?

An investment in equity is risky and you must invest in equity, only if you can bear risk. Equity mutual funds and shares increase in value, much faster than inflation (rise in the cost of education with time).

Your child is 2 years old. You are saving INR 15 Lakhs for his MBA, when he is 21 years old. You will find that over 80% of the final value you require, has come from the growth in your savings, through an investment in equity.

A good investment in equity powers your savings and increases their value.

A final word. Investing in the modern age is all about being smart. Blindly saving without giving a thought to good investing is of no use.

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