START INVESTING FROM THE TIME OF ITS BIRTH

Read on to know the steps for investing in equity mutual funds to secure your child’s future
Murli Krishnamurthy

On the birt h of a child, a wave of joy and celebration runs through the family. The parents dream of a great future for the child and think of what all they can do to make its life on earth a lot easier than what it was for them. While there are many ways to secure such needs like children’s insurance policies, government’s small savings schemes, PPF, and more, the most efficient and remunerative would be the managing of the financial plan for the child through the equity mutual fund route. This is because empirical evidence suggests that a fixed interest bearing security would certainly return less than a good diversified equity scheme as the period of investment envisaged is normally more than 10 years plus.

While there are scores of schemes specifically for children, they are all essentially equity or balanced funds with restrictive exit loads to ensure that there is no premature encashment of the units before the period for which they have been sought. But the fact that the investor parent is thinking about the child’s future needs is itself a basic guarantee that he or she would go through the full course, unless there is something extraordinary that crops up. In such cases, even exit loads are no deterrent.


The right time to start investing for the child is probably at the time of its birth itself. While gifts that come in from grandparents and well-wishers at the time of birthdays or any other occasions can be safely invested in a lump sum either in a liquid fund at times when markets are very high (as it is now) to be transferred into a diversified equity fund in a staggered manner, or it can be invested in a lump sum if the market levels are reasonable.

The parents must also start a Systematic Investment Plan (SIP) soon after birth, and where possible go in for plans with a free insurance cover thrown in by the fund houses. While planning for the child, the tenure of the investment is to be considered in buckets, such as school joining fee at five years, higher education fee bucket at 18 years, and marriage at say 25 years. Thus, for the shorter tenure of the bucket, it would be prudent to go in for a well-diversified large cap fund. For the medium term, one could go in for a mid-cap fund and for the longer duration of 25 years, a riskier small-cap fund would be apt.