Saving for child is a top most priority of every parent. You love your children and you desire to give the best life to them. You do everything in order to make them happy. You strive for the best education, the best house and the best surrounding for them. However, when it comes to saving and investing for a child perhaps you are not doing your best. Let’s take a look at the common mistake made by you while saving or investing for your child.
Saving for child – Avoid these 5 common mistakes
You make an investment in the fixed deposit.
The first common mistake made by almost every parent is making an investment in the fixed deposit for their child education or marriage. Parents consider that fixed deposit is the best investment option for their child’s future. However, reality is different. Fixed deposit is perhaps last investment option when it comes to saving for your child. Let me prove this argument.
- What is expected return when you invest in a fixed deposit? Maximum 8-9%, and if you are under a tax bracket of 30% return will be 6-7%.
Now let’s take a look at the education cost.
Cost of MBA Degree –
- Fees of IIM Ahmadabad MBA course was 5 Lakh in 2007 and today cost of same MBA course is 19.5 Lakh. Nearly 400% jump in the last 10 years.
- Average % change in fees by IIM Ahmadabad is more than 10%.
Looking at increasing education cost the same MBA will cost around 50 Lakh after 10 years.
So, if you are planning to send your child for IIMA in 2026 you will need 50 Lakh at that time. In order to generate this corpus from the fixed deposit, you need to invest 27 Lakh in fixed deposit today in order to make it 50 Lakh by 2026.
In addition to above, you must have noticed that every year when you pay school fees for your children there is a rise of around 10% in fees.
In short, FD will never able to cope up with education cost and it is not the best investment option while saving for child.
Not saving enough money for your child.
It is generally seen that people are not aware of increasing education cost in India. They intend to save money but they don’t know how much money they should save or invest for their children. They invest money based on current education cost and marriage cost. They don’t consider future inflation on these expenses.
Another reason for not saving enough money for the child is an increase in the cost of living and unexpected expenses. Middle-class parents are unable to fulfill household expenses hence they are unable to invest money for child future.
You Invest money on your child’s name.
It is generally seen that people invest money on the child’s name. The logic given behind investing money on the child’s name is they want to keep money aside for their education or marriage. However, it does not serve any purpose.
Another reason given by people while making an investment on child’s name is to save tax. However, please note that investment made on the child name is taxable and parents are liable to pay tax on these investments. Clubbing of Income rule is applicable on these investments.
You purchase a child insurance policy.
The next common mistake that is made by most of the parents is buying a conventional child insurance plans. Child insurance plan such as endowment plan, money back plan and ULIP will generally give a return in the range of 6%.
Do you think that 6% return given by insurance policy will be enough to reach corpus required for the child education or marriage?
In addition to above, almost all insurance plans are rigid and do not allow easy exit or premature closure. So, it is better to avoid child insurance policy.
You buy physical gold for their marriage.
Apart from fixed deposit and insurance gold is also most popular investment option for the child. The return given by gold is variable and average return is almost equal to inflation. So, If you are planning to buy gold for your child marriage make sure that you buy a gold up to the extent it is required. Making extra gold for the investment does not make any sense.
You should also avoid mistake of buying a physical gold. Physical gold comes with an additional cost of making and storage. So, it is better to buy Gold ETF or Gold bond
Over to you –
Don’t get emotional by various child investment schemes and plans. Invest your money if you are sure about investment scheme and returns.
Remember famous saying – Dikhave Pe Mat Jao, Apni Akal Lagao 🙂
At the end, I would suggest you to make a balance portfolio consisting of mutual funds, equity and other sensible investments for child education and marriage.