Father's Day: Financial Investment Tips For New Fathers

Shivam is a first-time father, recently he celebrated the 2nd birthday of his son, Vaibhav. When asked what is one thought that concerns him most regarding the future of his child, Shivam’s immediate answer was - First, securing Vaibhav’s education funds, but on a long-term basis his financial future given the increasing cost of living. “There are multiple stages in the life of a child when parents have to spend money for the development. Education for instance will require multiple cash outflow from time to time. There could be significant outflows from time to time and regular outflows throughout the period till the time child becomes an adult and starts earning on his own,” says Gaurav Goel (Entrepreneur, and Sebi RIA).

Shivam wonders what would be the best way to invest his money and get benefits out of any investments he can make on behalf of his child. On the occasion of Father’s Day (15 June 2024) let’s explore ways in which fathers should ensure financial investments for their kids.

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What are the first steps a new father should take when starting a financial plan for their child's future?

Starting financial planning at an early age is a great way to provide security to your children. Bhuvan Rustagi, Co-founder and COO, Per Annum, lists four things to keep in mind:

1. Setting what your goal is, whether for their education, house-related or general security

2. Understanding market and risk patterns

3. Diversifying their portfolio to different asset classes

4. Contribute regularly, starting early can be beneficial as you will have a great investment till your child grows

How can fathers balance short-term financial needs with long-term investment goals for their children?

There would be two types of financial requirements as a child grows, Goel explains: Regular monthly and yearly expenses would fall in the bracket of short-term goals. If the parent is investing to cater for this requirement, then it should be fully liquid and easily redeemable. Such investments are usually made in short-term debt funds or kept in savings accounts. The returns on such investments are usually low.

Investments like college education and weddings should form a part of the long-term investing bucket. Such investments should be allowed to grow at a higher rate and depending on the risk profile money should be allocated in various asset classes like long-term debt funds, hybrid funds and equity investments.

“P2P is one really helpful asset class in such a case that offers returns up to 12 per cent without market volatility and with a clear exit point as you can choose the investment plan tenure as per your choice. Having such clarity on your investment is important if you have short-term financial goals,” Rustagi states.

What are some effective strategies for diversifying investment portfolios to maximize returns for kid's futures?

“Financial plan which caters to such requirement should be started well in advance even before the child arrives in the world,” says Goel.

Rustagi, says: “The golden investment rule is to never invest all of your finances/savings into a single asset class.” He further adds, “Today, in addition to traditional options, we have alternative investment options that help with stable returns. You can consider options like Peer-to-Peer (P2P) Lending, Non-Convertible Debentures (NCDs), Government Banking Schemes, and Real Estate Investment Trusts (REITs) to invest your money and achieve financial resilience in the future.”

Goel (Sebi RIA) lists certain Do’s to strategise their diversified investments:

- Parents should carefully draft a list of all major possible expenses at various stages.

- An emergency amount should be included in this calculation. Once they arrive at the total of all these expenses then this number needs to be catered for inflation.

- Current investment and savings should have a component earmarked for these expenses and accordingly invested.

- One should also take into account savings retained from income every year and add to this kitty for the final knitting of the plan.

Tax Benefits

What tax benefits are available to new fathers that can help with child-related expenses and maximise returns?

Did you know, that as a new father, you can claim several tax deductions to manage child-related expenses under the old tax regime? Here’s what Manikandan S, a Tax Expert from ClearTax suggests:

Education: When it comes to education, tuition fees are deductible under Section 80C. Each parent can separately claim up to Rs 1,50,000 per annum, significantly reducing taxable income. This includes fees for full-time education in India for up to two children.

Under section 10 (14), you can benefit from tax exemption for a Children’s Education Allowance of Rs 100 per month per child, up to a maximum of two children, amounting to Rs 2,400 annually. For children staying in hostels, there is an exemption of Hostel Expenditure Allowance of Rs 300 per month per child, up to two children, totalling Rs 7,200 annually.

Investments for Girl Child: If you have a girl child under 10 years old, the Sukanya Samriddhi Yojana offers tax-free returns and a deduction of up to Rs 1,50,000 under Section 80C only. To get this deduction, you can also invest in options like Unit Linked Insurance Plans (ULIPs) for children and National Savings Certificates. Holding your equity mutual fund for the long term can minimise tax liabilities while potentially increasing returns.

Healthcare: Section 80D allows deductions for medical insurance premiums paid for dependent children within a limit of Rs 25,000, including Rs 5,000 for preventive health check-ups. For dependent children with disabilities or specific illnesses, Section 80DDB provides deductions for medical expenses and maintenance for disabilities, with a deduction of up to Rs 75,000, or Rs 1,25,000 for severe disabilities, amounts depending on the severity of the condition.

“By leveraging these deductions, you can effectively manage and reduce your tax liability while ensuring your children’s needs are well-catered,” Manikandan S states.

Don’t Forget Financial Education!

One of the best financial investments you can make for your child is to perhaps impart and inculcate ‘financial skills’ in them despite what their careers turn out to be.

"As an inquisitive kid, I often bombarded my parents with money-related questions, unsure if they were always relevant,” says Ashish Singhal, Co-founder and Group CEO of PeepalCo.

“My parents always responded with utmost sincerity, making me feel that each question was important and deserved an explanation. I aspire to create the same nurturing environment for my child,” Singhal remarks.

He adds: “Like my father, I believe that these early questions significantly shape a child's understanding of basic everyday finance.” You can build financial skills in children by involving them in everyday financial decisions, openly discussing money management, and teaching the importance of financial responsibility.

“This early education will help them develop healthy financial habits, understand the value of money, and make informed financial choices as they grow."

Common Pitfalls To Avoid

Investments often come with associated potential risks, and new fathers should be careful about a few aspects when investing in their children’s future. Rustagi suggests the following Don'ts to keep in mind:

Not starting early: One should never wait for their kid to reach a certain age to start investing. The earlier you do it, the better outcome there will be for you.

Not having clear goals: Before you kickstart the investment process, your goals should be absolutely clear. Whether short-term or long-term, setting goals for your investment journey is important for you to stay focused and committed to the process. It could be the education of your children, their marriage, owning a property, or general security, clearly enlisting your investment goals.

Relying on high-risk investments: It’s never safe to invest all your savings or finances in one kind of investment channel. One should always diversify their portfolio to mitigate risks. Today, we have alternative investment options that provide stable returns and act as a hedge against market volatility.

“We would also strongly recommend parents to take pure life term cover for both the parents a floater health policy with sufficient health cover for all emergency requirements. Insurance in any form should be avoided as it becomes an expensive affair,” says Goel (Sebi RIA). He further adds We would also advise parents to stay away from investment products they don’t understand. Quick rich schemes promising higher than usual returns should be completely avoided.”