Kolkata: Saving for their child’s future is one of the most important aspects of financial planning for every parent. While higher education is costly and is the main priority, some parents also plan for their child’s marriage expenses. Like every other goal, this one needs to be planned properly too. However, there are some common mistakes parents make when saving for their child’s future. We take a look.
1. Underestimating the cost of education: Like everything else, there is inflation in education too. However, education inflation is higher than general inflation and can be as high as 10 to 12 per cent. This means that cost of quality education 10, 15 or 18 years later will be substantially more than it is today. If we consider an inflation of 10 per cent, an engineering course that costs Rs 10 lakh now, will cost about Rs 41 lakh in 15 years. Correspondingly, costs for MBA, medical studies and foreign education will also be very high. Parents need to make a reasonable assessment costs before they start planning.
2. Starting late: Leaving investing for your child’s future for too late, is perhaps the biggest mistake you can make. Let us assume that your investment earns a return of 12 per cent and that you are looking to build a corpus of Rs 50 lakh. Also, let us say you are saving for your child’s future when she is 18. In the first instance let us consider you start saving for your child’s education when she is just born. In the other two instances, you start saving for your child’s education when she is 5 and 10 years old. In these there scenarios, you require to save Rs 6,598, Rs 13,433 and Rs 21,735 per month respectively to meet your goal. So the earlier you start saving, the better.
3. Investing only in debt: if you are risk averse and investing only in debt, you are making a big mistake. This is because returns on debt products barely beat inflation, hence your money will not grow fast enough to meet your goal. In the previous example if you save Rs 13,433 every month, you require 13 years to save Rs 50 lakh. If your rate of return is 8 per cent ( since you have invested in debt) in 13 years you will build a corpus of about Rs 39 lakh. Hence, you will fall short. In other words, by saving the same account of money every month, you can build a larger corpus if you invest in equity.
4. Avoid child plans: Child plans work because they have got an emotional attachment to it. Also, they inculcate a disciplined savings habit as you canot redeem the for 5 years or till your child turns 18. However, child mutual fund plans are normally balanced funds which invest in a mix of equity and debt. When the goal is 10 years or more away, it is advisable to invest in 100 per cent equity. Hence it is recommended that you invest separately in diversified equity mutual funds. The mix of equity and debt should be according to your risk appetite and also your time horizon. As you move towards the goal, you should move more funds into debt to prevent against marker volatility.