Investing a small amount of money every month can help you create a large savings fund for your child in the next 15 to 20 years to meet future expenses like higher education, their marriages or seed capital to start a company.
Let’s say you earn Rs 50,000 per month and you have a new born child. You will need some some money 18-20 years later when he/she is ready to go to college and then probably some more 25 to 26 years later for their wedding expenses.
If you invest just 5% of your income (Rs 2500) every month in SIPs, increasing it by 5% every year, with an annual return of 12.5 to 15 per annum% it can grow to:
- Rs 25 to 35 lakhs in 20 years, or
- Rs 48 to 73 lakhs in 25 years
Note: The above returns are possible via Equity Mutual Funds with returns ranging from 12.5 to 15% per annum
Most folks have a couple of insurance policies in their children’s name and assume that it will be enough – Nothing can be farther from the truth and be prepared for a nasty shock a decade later if this is your plan. Here is what you are likely to get if you buy a child insurance policy in which you are investing Rs 2500 per month or Rs 30,000 per year.
- Rs 9 to 12 lakhs in 20 years, or
- Rs 13 to 17.5 lakhs in 25 years
This is because insurance plans usually give returns in the range of ~4 to 6% per annum on an annualised basis but most people don’t realise it as they look at absolute returns instead of annualised returns. It’s better to invest in PPF instead of Insurance products if you want to invest in the Debt Asset Class of products.
Insurance companies also invest in the equity and make most of their profits from the markets ( see where LIC makes its profits ) – the difference is that they keep a large chunk of the profits with themselves, all in the name of safety and security.
You can also Invest a one time Lumpsum, apart from small month investments. Here is how much various sums of money can grow to in 20 years in Equity Mutual Funds:
- Rs 1 lakh can grow to: Rs 10.5 to Rs 16 lakhs
- Rs 5 lakhs can grow to: Rs 53 to Rs 82 lakhs
- Rs 10 lakhs can grow to: Rs 1.05 crores to Rs 1.6 crores
Don’t get fooled into buying Insurance Plans as Investment Products
Save and Invest smarter for your child with SIP or SIP + Lumpsum.