Plan for your child's future

Parents would want to secure their child's future. They need to start planning the finances well in advance, especially, with the current uncertainty in the market.

The initial requirements of a child are met as a part of the household's finance, without much thought. However, the future needs could get increasingly large and complex. The needs are unpredictable and specific to the child's ambitions, aspirations and achievements.

Education is the first major requirement for your child. The requirement could be protracted depending on the discipline pursued. In today's context of high inflation and absence of education subsidy, providing for such a necessity becomes expensive. This could also be followed by a period of apprenticeship, when the child may need further training and earnings are not commensurate. After providing for education, the next important requirement would be for settling down, including marriage expenses or starting a family. Some provision should ideally be made for other unforeseen expenses, such as an unfortunate illness. In all these expenses, an element of uncertainty creeps in, on account of the type of course pursued, the institution attended, length of time, inflation and other cost pressures.

Features

There are certain important features of child financial plans. One, the beneficiary is a third party, the child, while the parent takes the plan. The dichotomy arises as the type of plan adopted is mostly conditioned by the ability of the parent, including his residuary earning life. The success of financial planning for a child would be determined by the extent to which the planned policies generate cash flows.

The second important feature would be generating cash flows periodically. Requirements arise at various points of time. The requirements are often unequal. Some expenses could be one time while others, like fees, could be a regular expense. It would suffice to provide for certain committed expenditure, and the plan may terminate once the needs are all met.

The third feature is the certainty and inevitability of the requirement. The plan taken should, therefore, not contain unbridled risk. At the same time, the unpredictability of the need and the ever rising cost necessitate accumulation of a sizeable corpus to meet bulk expenses.

It may be relevant to note that financial planning solutions do not come as a comprehensive product at any one point of time. There is no unique product, comprehensive enough to meet all needs.

Asset allocation

Any accumulation plan is to be based on the fundamental strategy of pursuing prudent asset allocation through the Systematic Investment Plan (SIP) route so as to generate returns over time. The essence of a successful Child Plan is to start early. While deciding on the scheme to opt for, it is necessary to arrive at the intervals at which regular withdrawals would be required.

The plan should allocate investments across all asset classes comprising of Equity, Debt and Gold. While equity can generate higher returns, debt can give steady returns. Gold gives best protection against uncertainties and has generated positive inflation adjusted returns over the relatively longer term. The twin issues are best addressed by larger allocation to an equity oriented fund. Assuming accumulation over a 15-year period or longer, the equity component should comprise upwards of 60 per cent of the portfolio. Providing around 5 per cent in gold ETF and the balance should be invested in debt instruments. A Systematic Withdrawal Plan (SWP), spread over a period of time, should be built in the equity component to meet recurring needs, particularly for higher education.

(The author is MD & CEO, IDBI Mutual Fund.)

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