August 17, 2016

Encourage Clients to take Simple but Innovative Steps towards Child’s Future

Neeraj Bahal

Founder, Fasttrack Financial Planners

Simple steps to secure your child’s future goals

In my 10 years of profession as a financial advisor, I have always been a firm believer and advocated SIP as a form of investment for long term wealth creation. I have recommended clients to invest in SIP and align their investments to goals. What I have observed is that through this path of wealth creation there will be obstacles like job loss/switch, new house purchase, unexpected expenses etc. when wealth creation takes a back seat.

With my experience, I’d say that it is not a loss but a postponement in saving and investing; and yes, it does take time to get back that good habit. We can’t blame the investor as mutual fund is the most liquid option available and so unfortunately becomes the 1st choice, and an advantage of easy liquidity as compared to PPF and other saving instruments becomes a disadvantage. As an advisor, I cannot be the villain and stop the client from doing it. But I can certainly try to get them back on track after such postponement.

However, there is one thing I observe and has been consistent with my clients and that has been the SIPs which have been made under their child’s name. You can call it emotional attachment but nobody stops anything which is invested in their child’s name. It’s just that guilty feeling that the child’s future will be disturbed by liquidating the funds set aside for him, and trust me no parent wants to go through that guilt.

Therefore, I try and recommend a plan of action which would help a parent set aside funds for his child’s needs in future.

The First Steps

Firstly, I started investing in Mutual Funds via SIP in my child’s name. But only starting it does not make it right, there are a few things we need to do.

1. Once you have the birth certificate which is your child’s first proof of existence, apply for a PAN. A PAN is issued to a minor too and just need your child’s birth certificate, photograph along with your KYC documents.
2. Once the PAN is allotted along with the birth certificate open a bank account in his/her name and you as guardian. You’ll receive the cheque book bearing your child’s name. Start with the SIP investments.

This exercise creates a financial life by a separate account altogether. Yes, it is not your financial life; it is your child’s financial life. This helps you to keep a tab on both financial lives’ progress individually. The chances of you liquidating are less as it is in your child’s name.

Start Somewhere and Keep Growing

Allocate an amount which you think you can set aside for the first 2 years. I chose aggressive funds because I knew my timeline is definitely more than 10 years and aggressive funds will allow me to maximize my returns. Moreover, I review it once a year to see if any changes/additions are required.

There are many financial calculators apps for Android/Mac are available which help you determine the amount you need to set aside per month for your child’s goal. But initially, concentrate on setting aside and avoid the complexities. It’s about the habit of investing rather than investing. Have a long term view for your child; yes the numbers are important but more than that it’s important to start and after a couple of years assess and then keep increasing SIP amount. There will be ups and downs but eventually because the time horizon is more for your child, you will invariably end up creating wealth and contribute to your child’s future.

Drop by Drop

India has many festivals and everybody blesses the child, be it relatives or friends.  Keep depositing them in his account and you will notice that you don’t even need to fund his SIP, it takes care of itself. The money which you would have otherwise spent is put to good use and if there is windfall in future, then just increase the SIP amount or invest as a lump sum by making additional purchase and let it grow. It helps in purchase of toys and gold which you anyway as a parent buy, so whatever your child gets in kind should be from you and whatever he get form relatives and friend should go straight into his bank account.

So if you have a birthday party of a friend’s child or when he is born and you see him/her for the first time, avoid buying gift unless you are absolutely sure that the child needs it, else it will just be another toy or gift. At the risk of sounding like a money minded person, I would urge you to please give cash when you are gifting too, as it gives the parent to choose either they buy what the child needs or they invest for his long term goals. You can personally contribute and take a step further by paying all his expenses like school fees and other major expenses from his account. If you invest in SIP with growth as an option, there is no tax on capital gain provided the investment stays for more than 1 year.

Benefits of the Journey

When your child is growing up, trust me he/she is smarter than what you were, they will be able to see how the contributions have helped in creating wealth and they too start valuing money. Child get’s exposed too and learns about cheque books, bank account passbook and has cheques with his name printed on it and more importantly when he attains 18 with updated PAN he is ready to take charge of his financial life. You don’t have to go through changing bank accounts and transferring funds then. This way you will also contribute creating a generation of informed investor.

Geeta Ka Saar (Conclusion)

Once again, I am repeating the importance to save and invest for your child. Be it PPF or FD but the logic is to start and see the long term benefits. At the same time Mutual Fund will give a better return compared to any of the other investments.

It’s like when you tell your child to drink milk and then you urge and persuade him to drink it SIP by SIP, the same urge and persuasion is required from you in this journey with SIP.