- Bond Guru
Bringing up a family
“Train up a child in the way he should go,
And even when he is old he will not depart from it”
is advice from a religious text about 3,000 years old. It does not matter what religion this text is from, for it is built into wise parenting DNA irrespective of our religious leaning.
Following the dictum, “A fool and his money are soon parted” we provide our little children with piggy banks to drop their coins into. Saving for a rainy day is an excellent path most of us were guided to by our elders, and we point out the same to our progeny. This is one of the most wonderful gifts a parent can give their children.
Now let’s do what we do to our ice-cream treats – add flavours and sprinkles. Saving is good, investing is better. Investing for the long term, not just for the rainy day is the best. This is a gift that keeps re-gifting itself in more yummy flavours. Move your child beyond the piggy bank.
A habit has been defined as a slim rope to which another string is added each time it is practiced. Done regularly the habit can become unbreakable.
Therefore, start investing early. Let a Public Provident Fund (PPF) account be a birthday gift for your child. This could be linked to one of the parents/ guardians and the combined deposit for parent and child kept within the maximum permissible limits, currently Rs. 1.5 lakhs a year. To make it easy, consider a monthly deposit of Rs. 12,000 for the parent and Rs. 500 for the child. Hardly a burden for a family who works out a budget and keeps eating at restaurants to a rare occasion (the covid related restaurant closures has helped us get used to eating at home, so there’s no need to getting used to wholesome home food). Along with this start a Systematic Investment Plan (SIP) in a diversified equity mutual fund. When the child is an adult and ready to fly the nest the amount that would have accumulated in the investments would be a comfortable sum.
Those who can set aside larger sums and make single investments of Rs. 1.5 lakhs in the PPF, keep to the allocation between parent and child (consider Rs. 1.4 lakhs for the parent and Rs. 10,000 for the child) and deposit the money within the first 5 days of April, except in the year the child turns 18. In that year deposit the entire Rs. 1.5 lakhs (or whatever maximum is allowed at the time) in the child’s account after the 18th birthday (permitted for adults). Ensure the deposit is made before the 5th of the month so that interest is earned for the entire month (PPF does not pay interest for the month if the amount is deposited on or after the 5th).
At current interest rates, if Rs. 1.5 lakhs are deposited each year for 40 years, say between the ages of 21 and 60, the account accumulates almost Rs. 4 crores, not a small sum even after factoring inflation. Added to this will be the growth in the equity investments. But most likely your child will have a huge amount for a comfortable retirement and inheritance for their children from the savings habit and the magic worked by compounding.
Good investing habits include regular investing. Asset allocation, especially between the common debt and equity asset classes provide comfort and balance. Make this a lifelong gift to your little one that will last far after your own earthly sojourn.