3 mistakes to avoid when investing for your child

Sentiments run high when it comes to saving for our child’s future. But, are we investing right ?

Years ago, when I was still cutting my teeth with a weekly mutual fund advisory column in the newspaper I worked for, a senior colleague approached me with exasperation. Insurance was his ‘go to’ avenue for all his savings and he was looking to secure his child’s future the same way. He was shocked when an insurance agent pitched a children’s plan which, among other things, covered the life of the child, assuming the parents continued to live. How awful to think of a situation in which the child is no more and the parents enjoy monetary benefits from that unfortunate event, he thought. The pitch had the same repulsive effect as the packaging on tobacco products has, on most of us !

It is understandable that sentiments run high when it comes to saving for the future of our children. But are we making the right investment decisions for them?  Here are three mistakes to avoid.

Not inflation-proofing your returns

Risk averse investors usually turn to FDs or traditional insurance products to secure their child’s future. With tax-free interest on debt products becoming increasingly rare, the Sukanya Samriddhi scheme for the girl child from the post-office is hard to resist too.

However, going in debt products misses one important point – inflation-proofing. Did you know that education inflation in India is invariably higher than the widely followed CPI inflation number? Often it runs into double-digits, and it is almost impossible to keep up with education inflation without a smattering of equities in your portfolio.


 

Equity market investments, even through mutual fund route, entail some risk. But going in for equities for long-term investments evens out the return experience for investors and helps you cover for inflation. Assume you start with a Rs 5000 SIP in a lower risk Nifty 50 index fund when your child is 3 years old and continue it for 15 years (till the child turns 18). A 12% compounded return over this period gives you a sum of Rs 25 lakh. Stepping up the SIP by a small 5 % each year will lead to a higher Rs 33 lakh corpus. A SIP in a well-chosen actively managed fund can give you higher returns over the long-term. You may want to consider it especially if you are young, have a decent risk appetite and the time-to-goal is over 7 years. 

FOMO on children’s funds

If you are not a newbie to mutual funds or if you are a savvy equity investor, you could be holding children’s funds in your portfolio as part of your long-term savings plan for your child. Data from the Association of Mutual Funds in India (AMFI) shows an average assets under management (AUM) of Rs 25000 crore in these funds.

The key distinguishing feature of children’s funds is that they have a lock-in of five years or till the child turns 18 (whichever is earlier) – just to make you think twice before you use it up for other reasons. However, it’s a good time to take a relook at your children’s funds holdings for two reasons.

One, if you just went by the badge and didn’t check on the style or the portfolio, you would have missed that children’s funds can fall under any mutual fund category — ranging from flexi-cap to aggressive hybrid to balanced hybrid and even conservative hybrid. If you are starting investments for your newborn child and you have a good risk appetite, would you have been ok with conservative hybrid fund? The return experience here would not be very superior to a plain-vanilla debt product.

Secondly, the market regulator SEBI (Securities and Exchange Board of India) recently announced that this category of funds would be discontinued and that subscription to existing schemes would be stopped. (https://www.sebi.gov.in/legal/circulars/feb-2026/categorization-and-rationalization-of-mutual-fund-schemes_99983.html) Children’s schemes now will be merged with any other scheme having similar asset allocation and risk profile.

To save for your child, any category of mutual funds as per your risk appetite and time-to-goal is as good. As part of your review, do you find that you haven’t made an informed choice on the children’s fund in the first place ? Or, are you in a situation where you chose your fund with care, but now are worried that the merged scheme may not fit into your plans well ?  Don’t worry. Your advisor can help you take a call on your investments so that you remain on track to meet your goal.

Wiping out compounding in the home stretch

While setting the risk-return expectations and choosing the right products is half the battle won, preserving the gains as you near your goal is equally important. In the home stretch (ie last few years) towards meeting your goal, ‘when’ to exit is not an easy decision.  You need to avoid falling short of the corpus because of cautiously moving out to debt to preserve the gains made from equites. On the other hand, if you hold it till the last year or the last month in equities, a sharp market fall can wipe out years of compounding in very little time. You should also keep in mind that your corpus is what you get after paying long-term capital gains tax.

Safeguarding the returns and optimising the tax outgo, while reducing the risk is what you should aim for. Your financial advisor can help you navigate this phase.

Did you know that you can invest in mutual funds even for a new born child? If you wish to draw up a plan for your child’s higher education now or want to review your portfolio towards this goal, reach out to us today.