Author – Suresh Soni, CEO, Baroda BNP Paribas Asset Management India
Generally, every new generation in India has been better off than its parents, be it socioeconomic aspects or financial status. This is also possible because most Indian parents focus on financial planning for a better future for their children. Various surveys conducted in the country also show that saving for children’s needs is often considered one of the major reasons for investment.
While expectations and needs grow over time, so do the costs of realizing those plans, especially when the impact of inflation on essential expenses like higher education is considered. In earlier times, Indian parents used to save to meet traditional goals like marriage of children and they preferred National Savings Certificate or long term fixed deposit schemes for investment.
At the same time, today’s parents are giving priority to many goals for their children even before marriage – like higher education, be it engineering and medical or MBA and international studies. The expenses incurred on these have become as expensive as the cost of marriage. Now parents need to invest wisely in such options, which not only help them grow their wealth but also accumulate enough corpus to meet the needs and ambitions of their children. Also ensure that their investments keep pace with inflation and help their children thrive.
The rising cost of education: A sobering reality check
Suresh Soni, CEO, Baroda BNP Paribas AMC, says that when it comes to fulfilling their child’s dreams, parents are not ready to compromise on quality. On the other hand, the cost of education is skyrocketing. Inflation in education services is running at almost double the Consumer Price Index numbers announced by the government. With nearly 11 percent annual inflation in college fees, the cost of a good MBA program has increased nearly 8 times in the last 20 years. Such a sharp increase in the cost of education means that for many families, paying for their children’s education has become a financial burden. Therefore, if this is not planned well, the problems may increase and the children may miss the opportunity. He says that unlike most expenses, the cost of education is a necessary expense.
Equity is a better option for long term wealth creation
Parents who want to save for their children’s future need investment options that can beat inflation. Historically, equities have proven to be the asset class with the highest real returns over a period of a decade or more. Research shows that long-term investing in equities can deliver returns unlike any other asset class. Due to the power of compounding, even small monthly investments can build a substantial corpus over time. For example, an investor investing just Rs 9,000 monthly in a well-performing equity fund over 20 years can end up with a corpus of over Rs 1 crore. (Source: Baroda BNP Paribas AMC Internal Research)
Benefits of child plan in mutual funds
Children schemes offered by mutual funds can be a better option for financial planning for children. These funds offer an ideal mix of disciplined investment and long term growth. Most mutual fund schemes for children come with a lock-in period of 5 years or when the child becomes a legal adult, whichever is earlier. This would encourage long-term investment. This feature allows fund managers to invest for the long term with a strong strategy and confidence. Investments in the long term also benefit from the power of compounding, which can increase investors’ money manifold.
Suresh Soni says that due to the lock-in period in child plans of mutual funds, these schemes encourage long-term investment with discipline. On the other hand, professional fund managers select strong stocks on the basis of research. These two things together can rapidly increase an investor’s wealth by taking advantage of the compounding provided by the equity market. At the same time, if you also take the option of Step-up SIP, then the invested amount can increase manifold and all the dreams of your children can be fulfilled with this.
How to get started: SIP and Step-up SIP
Starting investments early and investing regularly can be a winning combination for parents who want to save enough for their child’s future. A Systematic Investment Plan (SIP) is a better option to invest in children funds offered by mutual funds, where a fixed amount is invested on a monthly basis.
With Step-up SIP, you can gradually increase your monthly contribution. As your income increases, you can increase your SIP amount accordingly. This allows you to build a large corpus by the time your child’s needs begin.
Flexibility to invest additional funds
Children’s plans also offer the facility to add lump sum investment. Be it annual bonus or birthday gift from family. These contributions can go directly towards building a strong fund for your child’s future. Such a feature ensures that any additional inflow can be used effectively to grow your child’s financial corpus, helping them reach their dreams and giving them peace of mind.
a final thought
By investing long term in equities, parents can create an investment that grows with the love they have for their children. Financial planning done thoughtfully and in a disciplined manner today can make a huge difference tomorrow, helping children achieve their dreams without facing any hassles.
Investing in a mutual fund child plan is not just about money, but it is also a testament to the hope, love and support that parents have for their child’s future. So take a step towards fulfilling those dreams – start investing wisely for a bright future as per your child’s potential.