Children's planning using the mutual fund route

Children have a great opportunity to undertake financial activities by using mutual funds and this can provide them with the rights tools to ensure financial independence over their life. There are a lot of ways in which a person can ensure that their children have the right amount of exposure to mutual funds.

Mutual funds can be used by children right from their young age to complete their financial requirements and at the same time this can be used for cultivating a lot of good habits that will be useful to them over their lives. Here are some of the ways in which children can be used effectively for this purpose.

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Specific schemes

There are several schemes that are present in the market and these are known as children's schemes. The idea behind such options is to ensure that there are enough chances available for the children when it comes to their future financial planning.

These have a specific investment mandate and the portfolio of such schemes is constructed in such a manner that most of them are balanced in nature. This ensures that there is the possibility of growth available through the route of equity while the debt portion will provide the necessary amount of stability. There are various choices available for selection in this area and the performance of these schemes has also been strong over the past years including the last 12 months.

While this might seem to be an obvious choice for the investors there is something more that can be learned from the process for children as this will be useful for them over their life time.

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Start early

Basics of finance can be easily imparted to children using the mutual funds route. This includes the concept of starting the financial planning process early in life. This is essential because the longer the time period for which the savings is undertaken in life the better it is as it provides the investor with a larger possibility to grow the money using the principle of compounding. Children have to be introduced to the concept of savings and investment very early in their life and this enables them to ensure that they have the necessary training to be financially savvy.

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If this is not done then the process of investments is always postponed to a later date and this can result in a situation where a lot of valuable time is lost. Exposure to mutual funds can help parents in achieving this objective. The early start enables them to build up their action over a period of time and this will be useful in having a strong portfolio. For example a sum of Rs 1000 invested each month for 10 years when a child is young would result in a sum of nearly Rs 1.83 lakh at an earning rate of 8 per cent.

If the earning went to 12 per cent then the amount would have grown to Rs 2.3 lakh. This is essential as the early start can provide a sound base for the child.

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Small amount

There is also the question of ensuring that the children are taught to build up a strong and large portfolio using small amounts. This is possible using the route of mutual funds as the minimum amount here is Rs 500 or Rs 1,000 especially when there is a systematic investment plan that is being undertaken. This will ensure that even when the amounts are small there is no bar to the process of investing and it is possible for the investor to complete this process smoothly. This is a very important lesson that the children have to learn and they can be taught using the mutual fund route.

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It is always better that a person experiences the whole situation because when they have money the same success can be replicated on a large scale when the available investment amount is Rs 25,000 or Rs 50,000 per month. Small amounts will grow to a larger figure over a period of time and this can be a very useful thing for any investor.

Discipline

One of the biggest lessons that can be learnt by the investor from the situation of the mutual funds is that there has to be adequate discipline that has to be followed in the entire investment. The fact that there is no easy way to success and that this can be built up slowly over a period of time has to be understood. Fluctuations in return can see times when the figure goes up to 25 per cent per annum to even -20 per cent but learning to take this in their stride is important.

The manner in which wealth can be built up will also lead to a position where the children will respect money and finances and this can actually shape their behaviour over their lifetime. This is essential because this is the time when the children are learning and hence they need to have proper control over their behaviour and if the right habits are inculcated at this time then it easier to follow the principles over their lifetime.

Overall

Once all these important considerations are present it will be easier for the child to ensure that they undertake financial activities in a proper manner over their life time. These building blocks will go a long way in ensuring that the base is right and that success can then be achieved properly.

Arnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.

The views expressed in the article are the author's and not of Sify.com.

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