Life Insurance: You should buy life insurance to provide financial protection for your children’s goals in the event of your untimely death. Term plans are straightforward protection policies and is the purest form of life insurance. Term plan is a much better option than traditional insurance cum savings plans like endowment or money back plans. Endowments and money back policies will offer a return of between 5 to 6% per annum. Term plans are more cost efficient than traditional insurance cum savings plans. The cost savings in premiums can be invested in mutual funds which offer much higher returns than endowment plans. You should also avoid child plans. The maturity benefit of child plans is much less then what you can get from a combination of term plans and mutual funds for the same monthly investment.
Investment: Since your child is very young, you have a long investment horizon to meet financial objectives for his or her higher education and marriage. You should invest in equity mutual funds through monthly systematic investment plan (SIP) mode. SIPs helps the investor stay disciplined towards their financial goals and also helps with the rupee cost averaging of the units purchased in volatile markets. Among equity funds, diversified equity funds which invest in both large cap and midcap companies are ideal for investors with a long time horizon. Diversified multi cap funds outperform large cap funds in the long term, but their downside potential is limited compared to midcap funds. Usually during this stage, parents also look for tax saving investment options under Section 80C of Income Tax Act. Equity Linked Savings Schemes (ELSS) is the best investment option for young parents looking to save taxes and investing for the children’s futures. An ELSS is essentially a diversified equity fund with a lock in period of three years from the date of the investment. Investment in ELSS qualifies for deduction from your taxable income up to the overall limit of र 1.5 lacs allowed under Section 80C in the last Union Budget. Top ELSS funds have given over 30% annualized returns in the last 3 years.
Investing in gold has huge cultural significance for Indians. Many Indian parents start buying gold for their children’s wedding even when their children are quite young. Apart from buying gold for weddings and other auspicious occasions, gold is also a good investment in the long term. Over the last 10 years investment in gold as a commodity has given nearly 17% annualised returns. Gold is an effective hedge against inflation and serves to diversify your portfolio since it has a negative correlation with equities. Buying gold jewellery is the traditional and popular form of investing in gold. While gold jewellery has its own aesthetic and cultural appeal, it is disadvantageous from an investment perspective. The making charges of gold jewellery can be 15 – 20% of the total cost. When you sell the jewellery, the jeweller will deduct the making charges from the selling price. The jeweller may also deduct an additional amount for impurities when you sell gold. Gold in physical form usually involves storage costs, since security is an important concern. . Physical gold also attracts wealth tax, if its value is over र 30 lacs. Gold ETF is the most cost efficient, safe and secure form of buying gold. A gold exchange-traded fund (or GETF) is an exchange-traded fund (ETF) that aims to closely track the price of gold. Gold ETFs are units representing physical gold which may be in paper or dematerialised form. The units of the gold ETFs are traded on the stock exchange like shares of a company. SIP is an excellent investment option for investing in Gold ETFs because SIPs can benefit the investors by taking advantage of volatility in commodity prices.