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How to introduce Investing and Mutual Funds
to your children
October 09, 2021
IPo-Aditya Birla Sunlife

Kids learn mathematics, languages, environment science, music, art, and a whole lot of subjects in their schooling, but where are the classes on the importance of saving and investing? You, the parents, are the best person who can inculcate the habit of savings in your child and teach them the significance of investing. Children learn from and behave the way parents’ guide them to be. Children, by their very nature, are curious, creative, and adaptive, giving them the correct guidance would help them get ready for the future. Introducing your child to the importance of saving, investing and money management will ensure a better quality of life.

When it comes to saving and investing, explaining to a 10-year-old about something that even many adults find difficult to understand is a tricky business. And who can be better than the legendary investor Warren Buffett if one wants to learn about investing? "I made my first investment at age 11. I was wasting my time up until then." - Warren Buffett. Yes, you read it right, he started investing at an age when most children think of playing with toys. However, he is of the view that he started too late! When it comes to investing, he is a firm believer that the sooner you start the better it is.

I made my first investment at age 11. I was wasting my time up until then. - Warren Buffett.

Financial Literacy in India

Before we go ahead, just have a look at some interesting statistics. The overall literacy rate in India stands at ~70%. Whereas the overall financial literacy rate in India was measured at just 27%! (source: NCFE FLIS 2019 ) When comparing this number with the rest of the world, it is very upsetting - in European Union countries, on average 52% of adults are financially literate, that number is 55% in the major advanced economies like Canada, France, Germany, Italy, Japan, UK, and the USA (source: Global Financial Literacy Survey ). Lack of financial literacy is considered one of the prime reasons for India’s slow growth. Nurturing financial literacy in children will bring an enlightening future for the country.

What is Mutual Fund

A Mutual fund (MF) is a modern way of investing – a simple, convenient, and affordable option for investors. A mutual fund is a kind of investment that pools money from investors to invest in various investment instruments/assets that has the potential to generate long-term wealth for investors. One can start a mutual fund investment with as little as ₹ 500 per month through a Systematic Investment Plan (SIP). That is less than what parents give their kids as their pocket money!

How to introduce investing/ mutual funds to your children!

Kids learn about nature and trees in schooling. It would be easy and interesting for a kid to learn about SIP investing with the example of trees, isn’t it? Let’s see how. Rahul planted a mango tree in 2000 and watered it regularly for nearly 20 years. The result – today after 20 years it has grown into a big, beautiful mango tree, and he is reaping the juicy mangoes. A big advantage, that the mango tree will keep giving fruits for the next many years. A monthly SIP can do similar wonders for your wealth. Trees also give shade in the heat. Likewise, mutual fund investment provides the investor the financial support (shade) in crucial times and helps in meeting various financial goals.

Let’s understand this with an example

Name RAHUL ROHAN RAJ
Age 10 Yrs 15 Yrs 20 Yrs
Monthly SIP in Equity MF ₹ 1000 ₹ 1000 ₹ 1000
Investment Period 30 Yrs. 25 Yrs. 20 Yrs.
Expected Rate Of Return 15 % 15 % 15 %
Total Investment ₹ 3.6 Lac ₹ 3 Lac ₹ 2.4 Lac
Corpus at Age 40 ₹ 69.23 Lac ₹ 32.44 Lac ₹ 14.97 Lac
Growth In Wealth ~19.25 Times ~ 11 Times ~6.25 Times

Here you can see, by starting to invest just 5 years earlier than Rohan (total additional investment of just ₹ 60,000) would help Rahul to create a huge corpus when he turns 40 – more than double what Rohan would be able to create.

The Power Of Compounding

You may wonder how monthly savings of just ₹1000 (that is ~₹34 a day) would turn into such a huge corpus. You may also wonder how just starting 5 years early and a small increase in total investment can more than double the outcome for Rahul and Rohan. This is mainly due to a factor that Albert Einstein called the ‘eighth wonder of the world’ – the power of compounding. A higher rate of return and a longer investment period makes compounding increasingly powerful. Therefore, the power of compounding works exponentially when you invest for a longer period such as 25, 30, or more years. Starting early and investing for the long term is the key to wealth creation.

START EARLY (Time) + INVEST REGULARLY (Rupee) = POWER OF COMPOUNDING = WEALTH CREATION

Endnote

It is obvious that a child cannot begin investing on his own, but as a parent, you can teach him the benefits of regular saving and its right investment and show him/her how it can help them reach various life goals, such as higher education, a dream bike, dream car, and more such goals.

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