While being a parent is a joyful experience, it does come with a lot of responsibilities. These are not just limited to attending to the needs of the child, but also extend to planning for his or her future.
In today's inflationary times, bringing up your young one can be a challenging task in itself. For example, look at the school-related expenses alone: fees, books, school bag, transportation and so on. These can put significant strain on parents' finances. And so it is necessary for every parent to plan for his or her child's needs.
Know the goals and goal amounts
Planning for your child's future starts with first listing the various financial goals, like your child's higher education and wedding. Once you have listed these, you have to estimate the goal amounts. At this point, many parents are clueless. They cannot be blamed for their ignorance because planning for the future requires estimating what amount of money they will need at different points in time.
Figuring out how much you will need
In finance, such calculations are made by estimating the amount in today's rupee terms and then inflating it by a certain rate. This rate is the rate of inflation. 'Inflation' is nothing but the price rise that you see happening over time. For instance, if you will need Rs10 lakh for your child's education today, in 10 years you will need Rs 21.59 lakh if the cost of education rises by 8 per cent per annum.
What's the underlying formula for this? Worry not. You can use compound-interest calculators available online in order to arrive at your goal amounts. Alternatively, you can seek the help of a financial advisor.
Building the corpus
But once you know the target amount, how do you go about accumulating it? You can do this in two ways: invest the entire amount in today's rupee terms in one go and make it grow by more than the inflation rate or invest small sums every month and grow these at a desirable rate.
The problem with the first option is that you may not have the required amount at hand. This makes periodic investments the best choice for most parents. When you make periodic investments in a mutual fund over time to build a corpus, you are following a systematic investment plan or SIP.
Equities are known for giving inflation-beating returns, so SIPs in equity mutual funds are an effective way to build a corpus for your child.