Imagine if someone gave you a bag of seeds on your fifth birthday. You could either let the bag sit idle in a corner of your cupboard or you could plant it in your backyard. Now fast forward eighteen years and you will find your backyard filled with fruit-laden trees that are ripe for the picking. Sounds great, right?
Now, what if you could do the same for your child? But this time, with real money!
In this article, let’s discuss how you can create the stepping stones of financial security for your little one.
Start investments at an early age
Many times relatives bestow gifts to children in the form of money. Instead of letting this money stay idle, you could invest it on behalf of your child. And as time passes, this amount grows into a substantial lump sum. When you start investing from an early age, the power of compounding ensures that even tiny investments make an impact. For example, imagine you invest just Rs 5,000 per month in a mutual fund that offers a return of 12%. By the end of 18 years, you would achieve a corpus of Rs 38 lakh!
How you can make it happen
You can make investments in mutual funds on behalf of your minor child. There is no restriction on the amount you can invest. However, you need to submit a valid document proving your relation to the child. Only a parent or a court-appointed legal guardian is allowed to make these investments. When your child reaches adulthood (at age 18), he can change the status of the folio from ‘minor’ to ‘major’ by submitting a form with the necessary documents. After that, your child can operate the folio by himself.
Systematic Investment Planning: the right way to go
The easiest and most effective way to invest on behalf of your child is through Systematic Investment Plans (SIPs). All you need to do is transfer a fixed amount of money regularly from your bank account into the mutual fund. This way, you can buy consistently buy units of the fund without worrying about issues like market timing. In the long run, it is possible for your child to achieve significant returns through rupee cost averaging. Fund houses offer many child funds that are ideal for children’s needs. Go through the different options and select a fund that is most suitable for you and your child.
Protect your loved ones through financial planning
It is not possible to predict what happens in the future but as responsible parents, it is necessary to be prepared for any unfavourable circumstances. As your child grows older, your expenses grow too. School fees, tuition fees, medicines, clothing, summer trips and electronics are some of the common expenses. Once your child graduates from school, the expenses only increase. Through proper financial planning, you can ensure that you meet all these expenses at the right time.
Like it or not, your child is bound to fly out of the coop one fine day. And as a loving parent, you can ensure that your child is financially stable when this moment arrives. Start investing from an early age and commit to long term investments for the best returns possible. Cut to 18 years later and you have financial ‘fruits’ ripe for the picking.