Finance

Published: October 6, 2023
Updated: October 6, 2023

Strategic Investments to Reduce Taxable Income and Secure Your Child's Future

Salaried individuals often seek ways to maximise tax savings by leveraging exemptions and deductions while calculating their taxable income. However, another critical financial aspect is planning for significant expenses associated with raising and educating a child. This article explores how strategic investments can help you manage these expenses effectively.

The Cost of Raising a Child:

Raising a child is a substantial financial commitment, with estimates indicating that parents typically spend between ₹60-70 lakh in the first 20 to 22 years after the child's birth. These expenses encompass various aspects of a child's growth and development, making it vital to plan wisely for this journey.

Strategic Savings and Investments:

To tackle the financial challenges of raising a child, adopting a systematic, disciplined, and rationalized approach to investing is essential. Here, we'll discuss how to approach these expenses by categorizing them into short-term, medium-term, and long-term objectives.

Short-Term Goals: Emergency Fund

For immediate expenses, such as medical emergencies, it's crucial to maintain an emergency fund. Consider setting aside ₹1 lakh in highly liquid and safe assets. Debt funds are a suitable choice for short-term goals due to their lower volatility.

Medium-Term Goals: Primary and Secondary Education

Budgeting for primary and secondary education requires a more extended time frame, typically 5-6 years and 10-15 years, respectively, if you start investing when the child is born. Use tools like the EduFund education cost calculator to estimate future costs and plan accordingly. Monthly systematic investment plans (SIPs) in mutual funds can help you accumulate the target amount.

Long-Term Goals: Higher Education

For long-term objectives like funding higher education, equity funds such as small-cap, mid- cap, or flexi-cap funds offer growth potential. These funds, while considered riskier, tend to deliver better returns over an extended period. Keep in mind that you should rebalance your investments as you approach your goal, shifting from high-risk equities to moderate-risk hybrid funds and then to low-risk debt funds based on your remaining time horizon.

Planning for both short-term and long-term goals related to your child's upbringing and education is essential. Initiate your savings and investments as early as possible and tailor your approach to each category of expenses. Remember that investments must be periodically reviewed and rebalanced as your financial goals and risk tolerance evolve. By investing strategically, you can secure your child's future while also optimizing your taxable income.