Mistakes to avoid while investing in a child plan

Right from the moment a child is born, parents start setting long-term goals for the kid. And to achieve these goals and ambitions, it is important for parents to plan a complete financial strategy, such as investing in a good child plan.

What is a child plan?

Child plans are a customised investment and insurance solution designed to meet a child’s financial requirements throughout the different stages of their life. This plan consists of two parts – coverage and investing.

Do you want to know how you can make your kid’s long-term financial child plan safe? Here are some common mistakes you should avoid while investing in a child plan:

·         Putting off your investments

Many parents make the mistake of waiting until their child starts going to school to save for their future. By then they have already missed out on five years of valuable time. The earlier you begin investing, the more time you will get to secure money for the future. You will also benefit from the power of compounding. A delay may lead to a significantly larger investment to fulfil your needs.

For instance, say you want to save Rs 50 lakh by the time your child is 18 for their college and higher education. If you start investing when your child is born, you will only need invest around Rs 20 lakh in an investment with average returns of 10% and the remaining Rs 30 lakh would be your estimated compounded returns. But if you start even 5 or 6 years later, the amount you’ll have to invest to reach the same goal in the same time frame would significantly increase.

·         Not taking inflation into consideration

Inflation is the gradual rise in living expenses. In other terms, the buying power diminishes with time. But what does this imply for the future of your child? It implies that future education prices may be considerably greater than current costs.

If we talk about higher education, the overall cost of attending MBA programmes at the top 25 business schools is rising. The same is true for all other fields of education. So, you must take this crucial factor into consideration while investing in your child’s future.

·         Investing exclusively in safe assets

If you are a cautious investor, you will gravitate towards fixed-income and other safe investments. But investing exclusively in fixed-income securities may prove to be a costly error as these products seldom provide inflation-beating gains.

You should consider your risk appetite and financial goals and build a diversified portfolio. You can consult a financial advisor to help you map out your investment strategy so that you aren’t being either too cautious or too aggressive when saving for your child’s future.

·         Ignoring the significance of life insurance

What is life insurance? A life insurance policy is a contract between a policyholder and an insurer that promises a lumpsum payment to a specified beneficiary upon the policyholder’s demise in return for a premium.

While investments assist you in saving for the predictable future, life coverage prepares people for the unknown. However, many parents are hesitant to purchase a life insurance policy or a ULIP (Unit Linked Insurance Plan) since they already have other assets in place.

What people often overlook is that in the event of an ill-fated event, a life insurance policy provides unmatched financial security for their kids, guaranteeing that their life objectives are met. So, be sure to incorporate life insurance within your portfolio.

·         Failure to match your investments with your objectives

Investing without a specific goal in mind can be disastrous for one’s future. As a parent, it is always beneficial to establish future objectives in your child’s life, estimate the money required to achieve these goals, and then determine how much you should invest for each. Another frequent mistake parents make is selecting short-term investments for long-term objectives and vice versa.

·         Overestimating the return on your investment

While inflation raises the price of goods and services over time, you must also account for potential losses in investment returns. Consider the example of Fixed Deposits (FD). Earlier, several banks offered interest prices as high as 8% to 10% per year. But the FD interest rate has now dropped to 5% to 6%. The same possibility of lower returns is true for different assets, including PPF, SCSS and bonds. When deciding on child plans, it is vital to account for a drop in investment returns.

Final thoughts

Planning for your child’s financial future is not a one-time activity. You have to set goals, review your investments regularly, indulge in strategic asset allocation, and be flexible to make changes. But such financial planning will ensure that your child can meet their future life milestones seamlessly and not be burdened with financial stress.

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