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Investment planning for your children’s education

“It starts out with diapers and baby food, dolls and cars, through clothing, books, tuition fee and graduation…”

Give your children the future they deserve
Every parent wishes to gift their children a secure financial future. We all wish that our child would be highly educated, and never face any financial constraints. However, education expenses are, by no means, low, and if sound investment planning is not done for your child’s future in a timely fashion, meeting these expenses can prove to be rather tricky. Fortunately, parents can, by following some broad investment guidelines, easily make the necessary financial arrangements for their children, without having to make any compromises.
Fixed investment horizon
Saving for children’s education has one significant advantage over many other types of investment – you know when you are likely to need the money. It could be their 18th birthday, their 21st or some other date you have in mind, but it means you can plan very specifically for the time frame.
Start early & invest regularly
Investment plans for children generally encourage parents to start saving from an early stage of their child’s life. Education expenses are continually on the rise, and there is no way to predict the figure at which these expenses will stand in a few years’ time. Hence, it makes sense to put aside a part of your present income regularly towards your child’s education fund.
Powerful growth for the long-term
If you know you will be investing for ten years or more, you may want to consider investing a major part of your investments in stock-based funds, as these funds offers long-term growth potential that other types of investment cannot match. Of course, recent years have reminded us that stock markets are subject to volatility – that is they can rise and fall unpredictably over short periods. However, the fact is that stocks tend to rise in value over the long-term
For example, if we take a look at the performance of the domestic stock market since 1994, long-term investors choosing to stay in the market for at least 10 years enjoyed annual returns of 59% on average despite the short-term market ups and downs.
If you to choose to invest in the stock market through a mutual fund, you can considerably reduce the level of risk involved. This is because you will be holding a selection of stocks chosen by an expert fund manager, so each company that the mutual fund invests in is only a small part of your total investment portfolio. You can potentially reduce risk even further by holding a mix of mutual funds that invest in different sectors or geographical regions as this gives you access to a wider range of opportunities.
Switch between asset classes
Another advantage of investing in stocks is that you can take your money out easily at any time. As a result, as you come closer to the time when your child will need the money, you have the option of moving your savings into less volatile asset classes such as fixed income funds. These don’t offer the same level of growth potential as stock funds, but they are also much less likely to fall in value. You could also move some of your savings into money market funds which provide a relatively lower return but are largely risk-free and very liquid.
The idea is that as you come closer to achieving your financial objective, for example when your child  becomes eligible for college, your savings should be transferred to more liquid and secure assets such as fixed income and money market funds.
Pick a fund that does the work for you
If you don’t want to manage the move from stock funds to fixed income and money market funds yourself, you could choose an investment plan that does it for you. A customized children savings plan will automatically move your money over the years, so that you take the right level of risk at the right time. All you have to do is choose the maturity age for your child’s plan and proceed to making regular contributions. The fund manager will make allocations on your behalf in different asset classes such as stocks, fixed income and money market, keeping in mind your overall investment objective and maintaining a balance between capital appreciation and liquidity.
Four essential investment ideas:
The best time to start investing is now
Investing for children is all about the long-term; to give your investment as much time as possible to grow, you need to start investing as soon as possible. The sooner you invest the more time your money will have to grow. You will also benefit more from the power of “compounding”, which is the snowball effect you have when the growth your investment has achieved also starts to grow. If you delay, you will probably have to invest much more to achieve a similar result.
Invest as much as you can afford
Many people find it hard to work out how much money they need to save to help fund their child’s education.
This is why the best strategy is to put aside as much as you can afford. This means you are not just more likely to achieve your goal, you could build up more than you need – which could then help you with any other expenses you may face, such as your child’s marriage.
Think about saving each month
Unless you have a large sum to invest, a good way to build up significant savings for your children over the years is to start a monthly savings plan. This can help you maintain a long-term investment strategy and is a useful way of being disciplined about saving for your children’s future – you will soon start thinking of your regular payment as an essential part of your budget. Monthly investments also give you a way to smoothen out the market volatility. If stock prices go up, the stocks/units you already own will increase in value. On the other hand, if prices go down, your next investment will buy more stocks/units.
Don’t try to time the markets
Instead of investing straight away, you might be tempted to wait for the market to reach a low point or for confirmation that a recovery is really happening. But how will you know what this low point is? And how long do you wait until you are sure it is a recovery? Even the experts find it impossible to “time the markets”. If you put-off making an investment because you think prices will fall further or you are not sure they have really started to recover, there is a risk that you will miss out on the significant rises that often occur in the early days of an upward trend.

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