As your child sets foot into teenage and his expenses grow, or if he is mature enough to start managing his finances early on, he will get curious about and want to start investing. This might just be the best decision you could help him take as a parent. Encourage him to start his journey towards investing by listing out the options, explaining the due diligence, hard work and commitment that go into the act, pointing out the pros and cons as well as the dos and don’ts, and finally taking the steps for the actual investing to begin. Here are 4 simple steps that you can take to make your child understand the basics of investing.
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Help set up goals, understand purpose of investing
Even before you point out the several investment avenues, help the child formulate the financial goals for which he wants to invest. These goals can be as small as wanting to purchase a phone or a bike, and as big as buying a house or funding a vacation abroad. The goal term can be as short as a year or as long as 30 years. Understanding the goals or the 'why' behind their investments will help kids zero in on the right investment option and the sufficient amount that needs to be regularly invested. The goal value will, of course, also depend on the sum available to be invested as a lump sum or on a consistent basis. While some investors consider introducing their kids to the experience of investing without any goal in mind and open-ended wealth creation as the objective, it is best to put the child on a track that he is likely to follow and need as an adult.
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Research investment, return & risk options
After outlining goals, timelines and goal values, help them pick suitable investing options. You will not only need to explain the working for each, but also the likely returns and risks associated. Explain common options such as fixed and recurring deposits, PPF, mutual funds (debt/equity/hybrid), stocks and real estate. List the pros and cons of each, allowing the child to pick on his own. If the goal value is not too high and the time frame is short, the child could opt for a recurring deposit. If the goal is long term in nature, you can suggest investing in equity mutual funds. If he wants to explore stocks, explain the diligence it will require to research on the company he wants to invest in and the follow-up monitoring it will require.
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Do the paperwork and start investments
Once the investing options have been selected, open the required accounts, whether it is a bank or a demat account. If the teen is nearing adulthood, have him fill out the forms under your supervision. Let him deposit the monthly allowance in his account, and monitor periodically how the money is growing and whether he is on track to achieving the goal. Set up e-mandate if the money is being invested from his account and explain the importance of having the required amount in the account on due date.
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Warn them about risky assets, start small
For proactive teenagers, the lure of easy money in stocks and cryptocurrency can be difficult to resist. It is, however, best to ignore such speculation at this stage. While you can explain the concept and risks associated with such investing, if the child insists on trying these out, let him do so with a small amount that you are ready to write off. Let him invest for a longer duration so that he understands the pain of losing money as much as the pleasure of earning a quick buck.
