Selecting the right fund for your child – is not child’s play!

These days, with the cost of education going through the roof and the interest rate on fixed income investments headed downwards, it is indeed a daunting task to set aside a sufficient sum to ensure that your kids have the best. Everyone knows that astute investing is the only way to build up an appropriate corpus to meet one’s child’s future needs. However, most parents were overwhelmed with so many investment options that are available. Most parents are so involved in getting ahead in the ‘rat race’ that they hardly find the time to manage their own commitments and planning for the financial well being of the child is left in the ‘backburner’. ‘Mutual funds’ are the ideal solution. Your investments are managed by experts. You can choose to invest in small amounts at regular intervals and go about your work as usual, content in the knowledge that your money is in professional hands. Many fund houses have structured ‘Child plans’ which aim to invest for your child's education or marriage or business. Here are a few things you must keep in mind when you choose a child plan: • Capital appreciation is the name of the gameWhen parents are looking to set aside money for a child’s education, they are looking at building up a corpus. Hence their investment objective is ‘capital appreciation’ or ‘receiving a lump sum capital growth’ when their child reaches a certain age or at the end of a target period. It is important to ensure that your plan has a similar objective. It must be noted at this point that fund managers have a better chance of ensuring capital appreciation if the fund is a closed ended one. In the case of an open ended fund, investors have the option of redeeming at anytime hence some amount of money has to be held in cash in order to meet the redemption requests. • Safety of your investmentSince there can be no compromise on your commitments to your child, you cannot afford to gamble with the money that you set aside for this purpose. Yet despite that fact that child funds have an exposure to the share market, they have a lower risk associated with them in comparison to pure equity funds. One can say that these funds are managed conservatively. Most fund houses have capped their investment in equity at a level between 65 per cent and 70 per cent. The fund manager thus has the option to shift the funds from equity to debt when the markets are over valued, as well as the flexibility to shift to equity when the markets decline. By smartly allocating assets across debt and equities, he can ensure that he enters low and exits high, the cornerstone of a successful investment strategy.• Invest for the long termChild plans usually come with a lock in period. This works to your advantage. Over the short-term, equities are the riskiest assets; over the long-term, if you tread wisely, they can generate the best risk-adjusted returns. That is just what fund houses do; they have a lock in period to give the fund manager the time and flexibility to make really long-term investments in the child fund. Hence for parents who want to build a corpus for their children over the long-term, a lock-in is indeed an ally. A lock in also deters parent from making premature withdrawals. End note:A bit of advice, don’t just put your money in a fund because the name says ‘Child Plan’. Instead, ensure that your goals and the investment objectives of the fund are aligned. If some of the features of these fund appear restrictive, for example the lock-in period, cap on the amount being invested in equities, etc. it pays to remember that over the long term these ‘restrictions’ work in your favor. So, go ahead, invest today and ensure that your kid’s future is bright!--Stock Broker employed with a leading Brokerage firm in India. To read more about Stock Trading click here.Source:

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