Why Your Newborn Child Needs You To Start investing NOW

Large savings and rising costs A key reason new parents need to start saving early for their children are the high, and ever increasing, expenses for let’s say their higher education. Here is an example.

The tuition fees for a person starting four year BTech course at one of the prestigious Indian Institutes of Technology (IIT) was about Rs 1.38 lakh* in 1999. If the same person’s daughter embarked on the same course in 2024, the cost would have been approximately Rs 10.99 lakh**, an eight fold increase over 25 years, or 8.66% annual rise. Compare this with the average annual inflation of 6.03%# in the same period.

For the same discipline, tuition costs are likely to be higher in many private institutions and higher still for overseas education, typically upwards of Rs 12 lakh annually, depending on the country. Of course, for many other disciplines the average inflation will lower but with average annual inflation for higher education according to one recent study was 11-12%## i.e., costs doubling every 6-7 years.

Cost of delay: For example, a newborn child, assuming a college or bachelor’s degree studies costs Rs 6 lakh today and is expected to experience 10% higher education inflation, it will rise to Rs 33.36 lakh when your child is ready for it at 18. This means you need to make a monthly investment of Rs 4,400 in an investment growing at 12% annually i.e., faster than higher education inflation.

If you start with the same investment two years later, you need to invest say ~Rs 5,795 every month, or assume 31.70% more. Since, you cannot delay your child’s higher education, greater the delay, higher the regular investment required.

The other options after a late start like assuming unacceptably high risk in investments for high returns may not be feasible. Education loans only provide funds till a limit and with restrictions, saddling you with repayment burden. The same burden prevails for other loans like loan against traditional instrument, home, and gold. Premature use of retirement funds, a popular recourse in India, is a possible setback for retirement planning.

Steps Before Your Child’s First Birthday

Seek to ensure ample investment: Till the time you accumulate adequate sum for your child’s future, your family needs financial protection with adequate insurance cover for life, health, income and large assets like car and home.

You need to supplement this with an emergency fund that may provide 3-6 months of home expenses.

Identify child’s major needs and costs These could be school admission and other expenses in say 2-4 years, gadget purchases, coaching and other significant expenses say from age 5-18 years besides graduate and post-graduate education costs. Estimate the costs for each of the periods. You can do this yourself with online calculators or take the help of a financial advisor.

Estimate the time horizon The time you have at hand to raise the money for the child’s specific need, influences the choice of investments you make.

Determine regular investment amount Based on the time at hand, the money required and a reasonable expectation of potential return, one may determine the regular monthly investment amount.

Based on the time at hand for child’s different requirements, parents can start regular investments in appropriate investment options during the child’s first year itself. This may be considered by investing through mutual funds i.e. by using the facility of Systematic Investment Plans (SIP). For different goals, specific SIPs could be earmarked which will involve regular investments of pre-decided amounts.

Needs In 2-4 Years This involves major expenses like school admission and childcare costs. For needs expected in 3-4 years, parents might consider SIPs in debt mutual funds.

Needs arising in 5-18 years These are typically expenses arising in middle and high school. These include coaching fees, equipment and gadgets for sports and performing arts. For such requirements, parents can consider SIP in a high risk and potentially high return categorized scheme may be considered. Such a fund primarily invests in equities supplemented by investments in debt and derivatives as mentioned in their Scheme Information Document. The composition of investments and the freedom to change it based on market conditions, makes balanced advantage fund returns less volatile than that of equity mutual funds. Such investments can be supplemented with other hybrid funds such as equity savings scheme.

Needs arising in 18 years and beyond These are typically large savings required for undergraduate and other higher studies. Here, you may consider supplementing mutual fund SIPs with popular long term investment avenues based on the risk profile and end goal.

Open a PPF account Consider opening a Public Provident Fund (PPF) account in the child’s first year itself. This investment with 15-year term, extendable in blocks of 5 years, typically offers one of the highest interest rates among Small Savings Schemes. For the girl child there is another Small Savings Scheme, the 21-year term Sukanya Samriddhi Account Scheme. Its interest rates are typically higher than PPF with both being eligible for annual tax deduction of up to Rs 1.5 lakh under Section 80C in the Old Tax System.

Consider different equity funds With investments in equities, equity mutual funds have the potential for high long term returns after riding out short term market turbulence. Equity Linked Savings Scheme (ELSS) is a popular equity mutual fund and a tax saving mutual fund eligible for annual tax deductions of up to Rs 1.5 lakh under Section 80C under the Old Tax System.

New parents can also consider SIP investment in an index fund based on large cap index. This means index funds based on broad based indices like Sensex, Nifty 50 and Nifty Next 50 and Nifty 100. Subsequently, one can add investments in large cap mutual funds and be supplemented by few mid cap and small cap mutual funds. To contain volatility of overall returns and ensure consistent growth, mid cap and small cap fund investments can be restricted to 20-30% of the portfolio for child’s higher education.

While selecting mutual funds, compare fund performance with scheme benchmarks and peers over 1, 3 and 5 years. A mutual fund advisor can guide new investors. If you are reasonably sure of future pay hikes, opt for Step Up SIPs. Here, the regular investment amount is increased periodically by a fixed percentage, say 10% annually. The same overall approach for the elder child can be replicated for the younger one too.

Ancient Roman philosopher Seneca had said, “Luck is what happens when preparation meets opportunity.” An early start in your financial preparations can go a long way in ensuring that your child can avail of every opportunity when it presents itself.

Source Reference

* https://www.iitk.ac.in/dosa/DOSA/reg.htm

** https://erp.iitkgp.ac.in/UGAdmManual.pdf; https://www.careers360.com/university/indian-institute-of-technology-kharagpur/courses

# https://www.statista.com/statistics/271322/inflation-rate-in-india/

## https://business.outlookindia.com/news/education-inflation-at-12-tackle-it-with-smart-investments-cheap-loans-says-report-news-308187