By
Mr. Anil Rego, Right Horizons
Every
parent wishes to provide the best for his/her children, be it higher education,
marriage, or /even buying them their first car. Achieving this requires a
multi-pronged approach.
To
begin with, it’s important to keep a tight control on the cash flow as money
management is crucial to ensuring financial success. If one is not sure where
the money is flowing out to, it is difficult to manage it.
Ideally,
one should have in place a monthly budget, charting out the income and
expenses. This will ensure that unnecessary debt does not pile up.
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| Anil Rego, Right Horizons |
The
next logical step is to determine a financial plan — deciding on the crucial
life events one has to plan for, ranging from education to marriage, and the
time-frame for achieving these goals .
For
example, if you have a two-year-old child, you have at least 23-25 years to his
marriage, which gives you enough time to start saving for it.
It
is crucial to start saving as early as possible to benefit from the power of
compounding.
Let’s
assume you have a financial goal of reaching Rs. 50 lakh as your target amount
in 10 years, and the rate of interest is 14%. Then, you need to invest Rs.
18,853 every month for 10 years to reach your financial goal.
Now,
assuming you have 15 years to achieve the same goal, you need to invest just
Rs. 8,316 every month.
It
is also advisable to save for near-term goals (like food, toys, medicine, etc.)
via debt instruments, and invest in equity instruments for long-term goals,
like education or / marriage.
You
could use avenues like PPF, balanced
mutual funds / large-cap mutual funds or / insurance plans based on your
preference. We would suggest that you invest in the equity markets through a
mutual fund as they need not be monitored on a daily basis.
Also,
you need not be a seasoned investor to take advantage of the equity market.
Debt
instruments are much less volatile with the capital being more or less assured,
but give lower returns. It is always advisable to have at least 20% of the
portfolio in debt instruments.
Gold
is another interesting investment avenue, especially since it is regarded as a
safe haven in times of distress.
Having
about 5% to 10% of your portfolio in gold is advisable. However, given the
current scenario, we would suggest that you purchase physical gold only for essential
requirements, like marriages, etc, and invest in it through ETFs /mutual funds
in order to diversify - this is especially true if a majority of your
investments are in equities.
One
needs to choose an investment plan that has the highest potential for growth at
as low risk as possible. It is advisable for you to invest in mutual funds
through Systematic Investment plans (SIPs).
Under
an SIP, you do not need to time the market, as the investment takes place each
month irrespective of the market conditions. It is advisable to remain invested
in SIPs for as long as possible, as you can then benefit from the power of
compounding.
Selecting
an investment avenue will depend on one’s risk profile and the time-frame for a
particular need.
About the author..
The
writer Mr. Anil Rego is CEO
& founder, Right Horizons.
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