Children’s Day: Want to start investing for your kid? 3 factors you must keep in mind
Investing for your children requires more than mere participation. It’s crucial to have a clear understanding of why you’re investing and the potential long-term returns. This comprehension aids in determining where to invest and the duration for which you should maintain your investments.
The youth represents the future, deserving proper care and guidance. In our contemporary society, where even education carries a price tag amid materialism, it is prudent to provide them with gifts that ensure their long-term well-being. As you prepare to commemorate Children’s Day on November 14 this year, aim to create lasting memories for the children by securing a better future for them. It is your responsibility to guarantee a secure future for your children, making it crucial to provide them with the essential financial foundation or a supportive system to help them progress in life.
Choosing the optimal investment plan for your children’s future can be a challenging decision, given the multitude of options available. Instead of solely seeking the best child investment scheme, it is advisable to diversify across various investment options. Diversification serves as a risk mitigation strategy; if one investment underperforms, the others may excel, helping to counterbalance potential losses. When selecting investment options for children, it is crucial to take into account the following factors:
Investment horizon
The duration of your investment, known as the investment horizon, stands as a pivotal consideration when selecting options for a child's investment. With a lengthy investment horizon equal to or exceeding a decade, you can comfortably embrace higher risk by investing in equity funds. Historically, equity markets have demonstrated superior performance compared to debt markets over extended periods. On the contrary, if your investment horizon is short, less than five years, a more conservative approach is necessary. Opting for debt funds or liquid funds becomes prudent, as a shorter timeframe leaves limited room to navigate through market volatility.
You have a plethora of investment options to choose from, depending on your investment horizon. Here's how:
- For an extended investment horizon, consider allocating funds to equity funds, which, while more volatile, carry the potential for higher returns over the long term.
- If your investment horizon is moderate, hybrid funds present a suitable option. These funds provide a blend of equity and debt investments, offering a balance to mitigate risk.
- For a brief investment horizon, it is advisable to opt for debt funds or liquid funds. These alternatives, while less volatile than equity funds, come with the trade-off of lower returns.
Diversifying your child’s investment portfolio is also prudent. Explore various asset types, including stocks, equity funds, debt funds, exchange-traded funds, gold bonds, and real estate, to reduce overall risk exposure.
Risk profile
Risk appetite refers to both your capacity and inclination to tolerate risk. Evaluating your risk appetite is a crucial step before deciding on investment options. With a high-risk appetite, you can comfortably venture into more volatile assets like equity funds, given the historical outperformance of equity markets over the long term. On the other hand, if your risk appetite is low, a more conservative approach is advisable, involving investments in debt funds or liquid funds. The table below outlines the correlation between risk appetite and investment choices.
Risk Appetite | Investment Options |
High-risk appetite | Stocks, Mutual Funds, Unit Linked Insurance Plans |
Medium-risk appetite | Debt Funds, Hybrid Funds, Gold Funds, Gold Bonds |
Low-risk appetite | Term Deposits, government-sponsored schemes, Certificates of Deposit |
Here are some guidelines to help you evaluate your risk tolerance:
- Take into account your age and financial situation. Typically, younger investors with a longer time horizon can embrace higher risk, while older investors with a shorter time frame should adopt a more conservative approach.
- Evaluate your investment objectives. Whether you’re saving for your child’s education, marriage, or retirement, your time horizon will influence your risk tolerance. Short-term goals require a more conservative approach, while long-term goals allow for a higher tolerance for risk.
- Factor in your investment experience. If you’re new to investing, consider starting with less volatile assets. As you gain experience, you can gradually incorporate more volatile assets into your portfolio.
- Assess your comfort level with volatility. Determine how at ease you are with the potential for short-term losses. If you find volatility unsettling, opt for less volatile assets.
Once you’ve gauged your risk appetite, you can proceed to select child investment options that align with your preferences and goals.
Financial goals
When selecting investment options, prioritise your financial goals. If you’re saving for your child’s education, focus on products that mature around the time of their educational needs. This may involve considering options like the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), or Unit Linked Insurance Plans (ULIPs).
For those earmarking funds for their child’s marriage, considering products with a more extended time horizon is advisable. Options like equity mutual funds, hybrid mutual funds, or ULIPs could be suitable for such long-term investment objectives.
Here are the guidelines for selecting child investment options aligned with financial goals:
- Assess the time horizon for each financial goal. Determine when the funds will be required.
- Gauge the risk appetite associated with each financial goal. Identify the level of risk you are comfortable with.
- Examine the tax implications of various investment options.
- Factor in your child’s financial needs, including the amounts required for education, marriage, and other expenses.
After taking these considerations into account, you can begin selecting investment options that best suit your circumstances. There’s no universal solution. The most suitable child investment options for you hinge on your unique circumstances.
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First Published:14 Nov 2023, 08:01 AM IST
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