SIP for Children: How Small Investments Can Create a Big Education Corpus
Whether it is a traditional plan, mutual funds, fixed deposits, or educational plans, smart & early savings is a must while planning your child’s future education. Children's educational plans are investment tools that are developed for parents to save & invest funds for their children’s future education. Unlike the traditional Child Insurance Plan, which offers a dual benefit of savings & protection, a SIP only focuses on wealth creation for a child’s future objectives.
Mutual Funds, a type of investment plan, are considered investment pools, where funds are collected from multiple investors & invested in a diversified portfolio of assets. The investors are supposed to share the profits & losses of the whole fund equally. Due to this shared ownership, these funds are known as “Mutual Funds”.
A Systematic Investment Plan (SIP) is a financial tool that enables an investor to invest regularly in mutual funds on a specified date. These plans are flexible, which helps build wealth over time by reducing risks & dealing with market fluctuations. It is a simple & hassle-free way to build wealth & stay disciplined with investments.
Things to be considered before investing in a SIP for your Child
Before investing in an investment plan, it is essential to consider certain factors, such as risk acceptance level, investment horizon, funds required, etc. Provided are the things to be considered before investing in a SIP for your children:
- Start Early:
It is advisable to start investing early, leaving scope for funds to grow through the power of compounding.
- Set Clear Goals:
You should be clear about the objective for which the plan is being purchased, i.e. whether it is for child education or marriage, to have a better understanding of the amount of funds & time required.
- Pick the Right Fund:
Select a plan that best suits your risk acceptance level & time horizon to achieve your long-term financial objectives.
- Decide on SIP Amount:
Decide the amount to be invested that best suits your budget & will be able to meet your future financial requirements.
- Tax Savings:
Some of the plans, such as ULIPs, SIPs, ELSS, etc., also provide tax benefits under section 80C of the Income Tax Act, 1961, allowing you to save funds while investing.
- Monitor Your Investment:
Monitor the performance of SIP, whether any adjustment, alteration or modification is required to achieve your financial goals, or if it is performing well.
How Does a SIP Work?
Provided are the steps to be followed while seeking SIP for children:
Step 1: Set Financial Objectives
You should be clear with your objectives, such as a child’s higher education or marriage. Ascertain the amount of funds required, along with the time when the funds would be required. You can also use the Child Education Plan Calculator to get an estimate of the future cost of the education & determine the amount of investment required.
Step 2: Research different Investment Opportunities
Look for different investment opportunities available, considering factors such as past performance, fund management fees, risk tolerance level, investment horizon, etc.
Step 3: Choose an Appropriate Mutual Fund
Select mutual funds that best align with your risk appetite & investment horizon, like child-specific funds, equity funds, etc.
Step 4: Open a SIP Account
After completing the required documentation, getting the KYC & address verification process done, choose a bank account from which the payment amount towards the SIP would be deducted on a monthly basis.
Step 5: Regular Investments
Parents should invest on a regular basis, & some children can also participate by offering funds towards their SIPs, building disciplined savings.
Step 6: Power of Compounding
The interest earned is compounded & re-invested on its own. Starting educational planning at an early stage would help achieve compounding benefits. This means investing in mutual funds after educational planning will help in getting quality education & the power of compounding.
Step 7: Avail Taxation benefits
If you invest your funds in the Equity Linked Savings Scheme (SCSS), you will be eligible to receive a tax benefit of INR 1.5 lakhs annually. This plan comes with a 3-year lock-in period & suits those parents who want to create wealth along with the taxation benefits.
Step 8: Review your Investments
Review the investment made on a regular basis to change its size with the increase in inflation or objective.
Benefits of SIP
Provided are the benefits of SIP Plans:
Rupee Cost Averaging
SIP uses the rupee cost averaging technique to protect investments, where investments are insulated, irrespective of the market fluctuations. It thus helps earn maximum units &average investments.
Inculcates Investment Discipline
SIP helps make a habit of savings, hence inculcating discipline. Here, the instalment amount gets debited directly from the bank account, keeping you free from the chance of default.
Using the SIP Plan for Child Education
SIP is considered a long-term investment that invests in a diversified portfolio, & lets the savings grow in the long term.
Power of Compounding
AS we know, the longer the tenure, the higher the returns from the power of compounding. Invest as early as you can, as SIP also possess the power of compounding, which helps create wealth in the long run..
Consider your child’s goals & aspirations
Consider the future cost that would be enough to cover your children’s goals & objectives in terms of their careers. Also, the increasing costs should remain stable, including inflation.
Opening a minor account portfolio
This has to be opened when a child is a minor in the name of a parent or guardian, which can be transferred in the child’s name when they attain majority.
Monitoring portfolio performance
One should review the performance of a portfolio on a regular basis to make adjustments & corrections.
Conclusion
A systematic Investment Plan is an easy, simple, & disciplined way to make mutual fund investments, which will help build wealth. It is meant for those who want to create long-term wealth with the help of regular & disciplined investing.
They let investors enjoy compounding benefits, letting them achieve long-term financial objectives. When it comes to child education, one should start investing in SIPs at an early stage & keep increasing the amount every year.