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SIPs for your child's future

Small but regular investments in mutual funds can help you build a large corpus over time


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Most of us won't deny that becoming a parent is one of the most pleasant feelings to have. While parenthood is a joyful phase, it does come with a lot of responsibilities also. These responsibilities are not just limited to attending to the needs of the child but also extend to planning for his/her future.

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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: fees, books, school bag, transportation and so on. These can put significant strain on parents' finances. Hence, it is necessary for every parent to plan for his/her child's needs.

Know the goals and goal amounts
Planning for your child's future starts with first listing the various goals, like higher education and wedding. Once you have established the goals, you have to estimate the goal amounts.

When it comes to estimating the goal amounts for their children's future, many parents turn clueless. They cannot be blamed for their ignorance because planning for the future requires estimating what amount of money they will need in the future.

How does one know that?
In finance, such calculations are done 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, 10 years hence, you will need Rs21.59 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 help of a financial advisor.

Building the corpus
But having known the target amount how do you go about accumulating it? You can do so 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 make them grow at the desirable rate.

The problem with the first option mentioned above 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, such a method is termed as 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 corpus for your child.

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