How to meet junior's needs over the years

Proper planning prevents poor performance. This holds true when planning for your child's financial needs, believe Aantra Dasgupta Ghosh and Pritam Ghosh lawyers from Kolkatta. They want to planning for their 15-month-old daughter Priyanshi Ghosh's financial needs.

Dasgupta Ghosh says, "Everything has become so expensive. I want to start financial planning for the child's needs from now on, so that we can manage expenses and make proper investments for her in the years to come." It is true that raising a child is expensive, but a few right financial moves can make a lot of difference.

Monetary gifts

A child's birth, birthday or festivals invariably brings gifts. Hence, this is the first thing that needs planning. Nisreen Mamaji, a certified financial planner says, "It is perfectly alright for parents to pass a word around to family and friends to give a child cash gifts instead of box gifts on a special occasion like birthdays or festivals. And, this money should not be spent, but rather invested for the child's future."

Numbers don't lie

The next step is knowing where you stand financially. Mamaji says, "Parents themselves will know the current living, recreation expenses. So, it's important to work the numbers out, tabulated into your income and expenses. There are two ways to increase the investible surplus, either you increase your income or reduce your expenses. When you start tabulating, you will automatically know you are spending on unnecessary things."

Deepali Sen, a financial planner reiterates those views. "'Which financial instruments to invest in?' is a question that comes later. The first thing is to tackle the mindset, to do the calculation, find what is the amount you will need at which stage of the child's life. Therefore, while there is time, don't do frivolous expenses," Sen says.

Remember, expensive birthdays and return gifts are all about the mindset. If you start keeping up with the Jones, you might end with more spending and hardly any saving. You can't change your fixed expenses, but you can cut on variable spends, up to 30%, through proper budgeting and expense management.

Once you do your numbers, you can easily work out your budget and increase your investible surplus across your financial needs, as well as your child's financial future.

A child's financial needs can more or less be categorised by the time duration. Short term, mid term, long term, and one-off events which come out of nowhere every few years.

Short term - There are short-term needs which would be year or so away. For instance, admission into playschool, nursery or proper school in a year or so, if your child is between two and five years today.

Then there are recurring short-term needs which come every year, like annual fee payment at the start of the academic year. Certified financial planner Pankaj Mathpal says, "Every month you have to save money, for expenses which will keep recurring every year. You can invest in recurring deposits, short-term funds, liquid fund, short duration, short-terms debt funds, etc. These are like your savings and not investments. These you will need to spend after a year for expenses like annual academic fees and like."

Remember, this is more to a saving activity than investment. There's no need to lose sleep over complicated products here.

Rachit Chawla, CEO, Finway says, "For the shorter term, choose debt mutual funds like liquid funds which give a yield of around 7.5 %, which is higher than fixed deposit, but tax-free. There are no additional charges, no management fee."

Mid term - Nowadays schools also take children out for international educational trips to visit places like National Aeronautics and Space Administration in USA and so on. Such foreign trips could happen twice in the school life of the child. Or maybe your child shows a special talent for sports or art and she needs to take a couple of trips abroad for such activities. You have to plan for these things, such as, sports tours, educational tours, short-term professional studies, higher studies. These are over and above you do as savings for regular expenses like annual fees. Investing in Equity Linked Savings Scheme is a good option for such mid-term goals. Sen says, "You could put money into the medium-term fund, where you can expect 8.5% to 9 % returns"

Long term - The best way to invest for the long term, is to do it monthly, says Sen. "Open a child's bank account and invest in his or her name, earmark those funds and don't mix it with other goals," she suggests.

When it comes to funding higher education, Mamaji says, "Start looking at colleges the child might be interested and figure out the amount needed. For instance, if you are looking to pay a college fee of Rs 1 crore, 18 years later and you are expecting a 15% return on your investment, then your monthly investment is Rs 9,000. And, if you get 13% yearly, then your monthly investment is Rs 13,000. For the long-term, a multi-cap or a mid-cap mutual fund would work well. The potential to generate higher returns is typically in these funds."

Another option to consider while investing in the long term is investing in index funds. Chawla says, "If you have a long-term goal, you should invest directly into an equity index fund. You can easily get a yield of 13-15% per annum just by investing in these index funds. There are no fund management fees here, it is low cost."

A word regarding child plans

Sen says, "If you have a long-term goals it makes sense to go with 100% equity investment. If you go for packaged financial products like a child plan, there may not be 100 % equity, plus they are expensive."

Chawla agrees, "Child savings plans charge a management fee. Parents should save every penny. So while investing choose a route where the cost of managing the fund is absolutely minimum. Which is to invest in the Mutual Funds via direct route."

Proper preparation prevents poor performance. Now that you know how to about savings and investing for various financial needs of a child, take action. But more important than meeting your child's financial needs, is imparting the wisdom of financial education. So, educate yourself on money matters and pass it on to your bundle of joy, like you would your financial treasure.

CATEGORISE CHILDREN’S NEEDS BY TIME

• Ask relatives to give cash gifts on birthdays, etc, which can be invested in your child's name
   
• For recurring short-term expenses like school fees, choose in RDs, liquid funds; this is more of savings rather than investment
   
• For medium term goals like educational trips, etc invest in ELSS or medium-term debt funds
   
• For longer term goals like higher studies choose 100% equity investments, either mid-cap or small-cap funds or index funds