Embracing motherhood is never easy as it comes with a whole new set of responsibilities for your newborn child which also include securing the kid's financial future.
Newcomers can invest in mutual funds, which means starting to invest in them quite early in life to benefit from the magic of compounding. Firstly, one must decide which mutual fund category to opt for.
A conversation with some personal financial experts revealed how choosing the right mutual fund category can help the kid the most when in need.
Viral Bhatt, Founder, Money Mantra, said, “Investing in mutual funds for a newborn child can be a great way to start building wealth and saving for their future. The right mutual fund category to choose will depend on various factors, including your investment goals, risk tolerance, and time horizon."
He suggests some mutual fund categories that could be deemed suitable for the same.
Equity-oriented funds: Equity mutual funds invest in stocks of companies and have the potential for high returns over the long term. However, they also come with higher risks due to market fluctuations. If you have a long-term investment horizon of 10 years or more, equity-oriented funds could be a good choice.
Balanced funds: Balanced funds invest in a combination of equities and fixed-income securities. They offer a balance between risk and return and can be a good choice for those who want to invest in a diversified portfolio of assets.
Rishabh Parakh, Chief Play Officer, NRP Capitals, explained, “When investing for a newborn child with a time horizon of 15-18 years, considering equity funds would be a suitable option. It is recommended to choose a combination of large-cap and mid-cap funds rather than pure large-cap funds. If you prefer large-cap funds, index funds can be a better choice. Some specific mutual funds to consider are PGIM Mid Cap, Quant Mid Cap, and SBI Large & Mid Cap funds. However, it’s advisable to avoid funds specifically marketed in the name of child investment.”
Also, you do not choose mutual fund categories based on some random whims and fancies. There are essential parameters that mutual fund owners must consider before putting money in such a fund.
Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor), elucidated, “Before starting to invest for children’s future, the parents need to consider factors like child's age and therefore investment horizon, possible education and career paths, own investment capacity and risk appetite. Assuming the parents are comfortable investing heavily in equity during the initial years, putting money in equity funds is the ideal way to accumulate capital for children’s future goals.”
“For sufficiently aggressive investors, the suitable equity fund categories for this goal are large-cap index funds and Flexicap funds though just a passive fund may be enough as well. The idea is that an index fund may not be the best performer each year but you will surely get market returns and you will also not need to keep churning your fund once every few years looking for the best ones. Those parents who want to have some debt component via mutual funds may consider aggressive hybrid funds if they are not using government savings options like the Sukanya Samriddhi Scheme or the Public Provident Fund (PPF),” explained Ashish.
Gaurav Rastogi, founder and CEO, Kuvera.in, said, “Numerous studies, both India specific and global, have shown that the only fund parameter that has some predictive power on future high returns is low fund expense ratio. So for your newborn, choose a fund with a low expense ratio and invest in it via the direct plan.”
Investing with the purview to accumulate and ensure enough money for your newborn child in the future entails a lot of responsibilities. Parents cannot just decide and pick up any mutual fund to invest in and rue on their decisions later on.