Your child’s expenses do not remain constant all the time. As the child gets older, the expenses start to increase. Expenses like school fees, tuition fees, living expenses, and expenses incurred on other necessities of education such as stationery, electronic gadgets, etc. All these increases as your child grows older.
Parents need to follow the right investing approach to keep pace with potential costs. If not appropriately invested, you may end up having insufficient funds when required, and the stakes can be huge since it is the question of your child’s future.
Hence, in this article, we will explore what would be the correct approach to investing and how the investments should be made by parents having kids between the age group of 5-10 years.
What should be the correct approach to investing, and how to invest?
If you are a parent having a kid between the ages of 5-10 years, you need to be very serious about your investments because you are going to witness a sharp increase in the education expenditure of your child.
The reason is that in the next 4-6 years, your child will complete his secondary education and then be required to take admitted to college. College fees are not the only significant expenditure that you will incur.
It is only the tip of the iceberg. Apart from the college fees, you may have to pay the class fees, especially if your child is willing to pursue courses such as engineering from IIT or an MBBS or an MBA from IIM.
Since the courses mentioned generally require the entrance exams to be cleared, the preparation starts much earlier, and you may incur significant outflow from your savings.
And remind you; education inflation is among the highest of all the categories. Therefore, you should start investing as soon as possible.
Smart Investment for Kids 1 to 5 years
How to do that?
- Step 1: First, identify the expenses that you will be required to incur and bifurcate them based on when they will be incurred, such as expenses to be incurred within a year, within 1-3 years, after three years, etc.
- Step 2: Once you bifurcate the expenses into these categories, you need to quantify the expenditure. Since the expenses will always be increasing due to inflation, you need to find out how much you will be required to pay; otherwise, you might end up having insufficient funds due to investing less than the required amount. To estimate the education expenditure, you can use the help of our cost calculator.
- Step 3: After estimating the amount and timing of expenditure, you need to estimate how much you need to invest to reach the goal. You can do so by using the SIP calculator.
- Step 4: Once you find out how much you are required to invest every month, the next step is to determine where to invest. Generally, the longer the duration, the higher the risk-taking ability, and vice versa. A longer duration gives you a chance of recovery if something goes wrong. This is not the case in case of expenditure to be incurred within one year. Hence the risk tolerance decreases as the time horizon reduces.
For long-term time horizons such as 3 to 5 years or even more, investors can consider investing in small cap, mid cap, flexi cap, or focused funds.
These funds provide good potential for capital appreciation over the long term. And the volatility also reduces over the long term.
For investments with a time horizon of 1-3 years, hybrid funds such as conservative or balanced advantage funds can be suitable since they provide the advantage of both portfolio stability and limited growth potential.
Also, an aggressive investor can consider investing in a multi-asset fund that provides diversification across various asset classes such as equities, debt, gold, etc.
At the same time, a risk-averse person can consider the debt funds such as gilt-edge funds or dynamic bond funds for the said time horizon.
And lastly, debt funds such as liquid funds should be considered for expenditure to be incurred within a year.
Please note the allocation to various types of mutual fund schemes depends on the individual’s risk appetite. You need to determine how much risk you can take, and accordingly, you need to select funds for investing.
- Step 5: The last step is rebalancing. You just cannot start investing and leave it as it is. It would help if you rebalanced your portfolio from time to time. As you come closer to your goal, you need to reallocate your investments to lesser risky funds since you cannot take high risks as you come closer to your goal.
So, this is the step-by-step guide for investing in your child. Hope you found this article useful. Thanks for reading!
