How to secure your child's future?

INVESTMENTSInvestment is distinct from Savings
Savings simply mean you set aside a portion of your income for future use. Yet, it is (careful and planned) investing that makes maximum use of these savings and optimizes your portfolio in later years. This is especially important since inflation tends to erode the purchasing power of money over a period of time. A headline inflation of 6%-7%, actually translates into a lifestyle inflation of 10%. Thus, if your money is lying in a deposit fetching 7% interest rate, you are actually eroding wealth!

In contrast, with the medium to long-term prospects of India’s growth being as strong as they are, the long-term returns on equity can be assumed to be 15%. Thus, this provides an effective way to not get left behind the growth story that is India.

Low transaction costsHigh degree of transparency in knowing how your corpus grows
The power of compoundingReturns on investments exhibit the effect of compounding. Very simply put, it means that the returns earned on the investment in the first year, gets added to the corpus in subsequent years and fetches its own returns. Thus, in the illustrative returns shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would only be Rs 2 crore in 10 years time.

Index InvestingInvesting in the index is possibly the best long-term way to benefit from the India growth story. You can invest in the index either one-time, or systematically as you earn more, or a combination of these. The benefit of index investing is the low transaction cost and low need for research involved. Thus, for those not very comfortable with the markets, or with those having no time to do extensive research, it is also a good starting point to gain familiarity with the working of equity markets.
Once you are more comfortable with equity markets and with how an investment portfolio works, you can consider allocating funds to more actively managed portfolios as well. These require much more research and active management, but at the same time have the potential to generate higher returns than the index by leveraging existing market conditions.

Trust formationVery often we come across customers desirous of making a trust in each of their children’s names. In India, unlike in some other countries, such trusts by themselves have no special tax benefits. Yet, they often have softer benefits such as helping mentally allocate resources for each child’s milestones, monitor each set of investments clearly, etc. Given the formalities and procedures around trust formation, maintenance and reporting, we would recommend this to people having a large corpus only. With most others, the money may be managed through mental accounting alone, without going through the legal procedures around trust creation.

Source: www.moneycontrol.com

Ravi Jhawar
Summer Intern-Technical Analyst
DENIP Consultants Pvt. Ltd.