Smart Investments for Kids of 1-5 Years: A Parent’s Guide
Parenthood is a beautiful journey full of smiles, joy, and love. Every child is a prince or princess for the parent. Like in any fairy tale, every parent wants their child to live the life of the prince or princess.
In real life, royal life means sending your child to the best school, graduating from top-quality universities, going abroad, and settling anywhere in the world. And to achieve this, parents are ready to do anything. But come to reality.
Inflation in education is among the highest. Another major obstacle is rupee depreciation if you want the child to go abroad for education. So how can a parent do all this?
Well, every parent can fulfill all the dreams of the child. How?
The answer lies in investing.
Let us see how parents can save and invest for their children between the ages of 1-5.
Money grows with time. The earlier you start, the more advantage you have. A slight delay in investing can result in a considerable difference over the long term.
Hence, it is advisable to start saving as soon as possible. “Start early and invest properly” is the appropriate approach every parent needs to follow to make their child’s dreams a reality.
But how to invest for the kids in the age bracket 1-5?
Investing depends on the risk appetite of the investor. How much risk you can take will determine how you should invest. And the risk appetite depends on the time you have in your hand.
The time when you require the money will determine your risk-taking ability.
Generally, it is considered that the more time you have in your hand, you can take a higher risk and vice versa. When investing for the long term, you can take the risk aggressively.
As the time in hand reduces, your risk-taking ability reduces, and you need to reallocate your money to safer avenues.
This can be better understood with the help of the following example. Suppose your child is 1-2 years old. Let us first list down what expenses you will have to incur.
It will be fees for kindergarten, school fees, graduation, post-graduation, electronics such as a tablet or a laptop, living expenses, and the list continues.
Investment Options Under 10 Lakhs
You need to identify the expenses that will be incurred in less than one year, three years, 3- 5 years, and after that. After identifying the expenses, you can decide how much risk you can take.
For the expenditure to be incurred in less than a year, liquid funds can be considered. A gilt fund or corporate bond fund can be a good choice for expenses to be incurred after one year but within three years. One can consider even a conservative fund.
Aggressive funds, balanced advantage funds, or multi-asset funds can be suitable in the case of 3-5 years. And for expenditures beyond five years, equity funds will be the best option.
Small-cap funds, mid-cap funds, flexi-cap funds, focused funds, etc., generate good returns over the long term. However, as you come closer to your goals, you need to move the funds from high-risk to less-risky ones.
It should be noted that the allocation should be based on the risk-taking capacity of the individual investor. The above are general rules of thumb.
One can choose to invest based on his or her risk appetite. E.g., an aggressive investor might consider investing in a balanced advantage fund for expenditure to be incurred within three years.
Generally, investing for kids between the age group of 1-5 gives the luxury of having an ample amount of time in hand.
As said earlier, the sooner you start, the less you need to save, and it becomes easy to reach your goal. E.g., if you want Rs.10,00,000 after five years, you need to start a SIP of Rs.11,290 only assuming an expected rate of return of 15%.
However, you need to save Rs.15,330 per month to reach the same goal if you delay your investments by one year. So, start investing as soon as possible.