Mistakes to avoid while investing for your child's future

Every parent wants the best for their child. From the time they first hold their newborn in their hands - and often even before that - most parents spend a great deal of time dreaming about the major milestones in their child's life. To fulfill these dreams and goals, though, parents need a comprehensive financial plan.

A financial plan is not merely about what you should do. It's also important to be aware of what you should not do. That way, you can avoid the costly mistakes that many parents often inadvertently make.

Curious to know how you can make the financial plan for your child's future fail-safe? Here are 7 mistakes that you need to avoid.

Delay your investments

Needless to say, this is one mistake that a vast majority of parents are guilty of. Many people put off investing for their child's future and only think about it when their child attains school-going age. That's a delay of around 5 years, which is precious time lost.

The sooner you start investing, the more time you have to save up for the future. You can also make most of the power of compounding by starting your investments earlier. By delaying this, you may have to invest a much higher amount to meet your requirements.

For instance, say you want to create a corpus of Rs. 75 lakhs for your child's future. And you want to save up this amount by the time your child attains 18 years of age. Here's how much you would have to invest, based on when you start your journey.

Not accounting for inflation

Inflation refers to the rise in the cost of living over time. In other words, the purchasing power of money reduces with time. And what does this mean for your child's future? Well, to begin with, it means the future costs of education could be much higher than the present costs.

Studies show that the total costs of attending the MBA programs in the top 25 business schools are on the rise. It's the same case with all other streams of education. So, as a parent, you need to account for this before you invest in your child's future.

Otherwise, your corpus may not be enough to enroll your child in the best education institution.

Overestimating your investment returns

While inflation makes the cost of goods and services rise with time, you also need to account for possible reductions in your investment returns. Take the case of good old fixed deposits, for instance. Where many banks used to offer interest rates as high as 8% to 10% per annum earlier, the average FD rate has now fallen to 6% to 7%.

This holds true for many other investments like PPF, SCSS, bonds and more. So, it's important to account for this kind of a dip in the investment returns when you plan for your child's future.

Failing to align your investments with your goals

Investing without any specific goal can be catastrophic for your future plans. As a parent, it always helps to identify the future goals in your child's life, estimate the amount needed for those goals, and work backward to figure out how much you should invest today.

Another common mistake that many people make is choosing short-term investments for long-term goals, and vice versa. The smart thing to do would be to select investments with short-term horizons for the near-term goals in your child's life, like paying for their coaching fees or taking them on a vacation next year. For the major goals due later in life, like getting into college or planning their wedding, you can choose long-term investments.

Overlooking the importance of life insurance

Investments help you plan for the known, while insurance prepares you for the unknown. Unfortunately, many parents shy away from purchasing a savings plan or a ULIP simply because they have other investments in place.

What they often overlook is that in case of their unexpected demise, a life insurance plan offers unparalleled financial protection for their child, ensuring that their life goals are on track. So, ensure that you include life insurance in your portfolio.

Relying solely on 'safe' investments

If you're a conservative investor, you will naturally lean towards fixed income products and other safe investments that offer guaranteed returns. But investing solely in debt and fixed income options can be a costly mistake, because these products rarely offer inflation-beating returns. And remember how it's important to inflation-proof your investments for your child's future?

Take the case we saw earlier. If you start investing Rs. 12,500 per month at an annual rate of 10% per annum as soon as your child is born, you can expect to generate around Rs. 75 lakhs by the time they turn 18.

However, if you choose debt instruments alone, the rate of returns could be lower, say around 7% per annum. In that case, if you invest the same Rs. 12,500 per month, it would take you around 21-22 years to create a corpus of Rs. 75 lakhs.

Spreading out your investment funds across different asset classes can help. When your child is still young, you have time on your side. So, you can afford to invest in high-risk, inflation-beating assets like equity and real estate. You can migrate to safer assets later, when your child grows up a little more.

Not reviewing your investment plan

Even if you get all of the above areas right, overlooking the importance of reviewing your plan can cost you dearly. You need to revisit your investment plan every year or so and ensure that your investments are performing as planned.

If your initial asset allocation has changed, review it and as needed. This way, you can make sure that you are on track to meet your child's future milestones without any delays or downgrades.

Last words

Creating a financial plan for your child's future may be challenging initially. However, with a few small areas covered, like goal-setting, asset allocation and periodic portfolio reviews, you can sail through the years and watch your investments grow just as you had planned. And then, when the time comes to fulfill your child's big dreams, everything will work out just right!