5 Things To Keep In Mind While Picking Stocks For Your Child's Future

Smart investments can help you avoid financial hurdles from limiting your child’s dreams and ambitions. Identifying quality stocks to invest for your child’s future is not a difficult task.

Here are a few important things to keep in mind while choosing quality stocks.

1. Where does the money come from?

Before investing in a company, you need to look at its business depth. You can know this by analysing a company’s sales and revenue figures also called the ‘topline’ in financial terms. If a company is a conglomerate, then every segment revenue and profit is reported every quarter. Track changes in preceding and year-ago quarters. Investing in a company that consistently grows revenue makes sense. These are typically companies that ride on India’s growth story. A standard thumb rule in the market is that if India’s economy grows by x% every year, such companies should grow business at 2x or more. If you regularly buy stocks of companies that show consistent revenue growth, it will help your child come close to his/her dreams.

2. Invest in operational efficiency

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) indicates a company’s operational efficiency. Basically, it eliminates the effects of financing and accounting decisions. Thus, it can be used to compare the profitability of various companies. It gives a clear idea about the company’s operating profit. A company with a high operating profit may give good returns to the investors. The performance on this metric is tracked for businesses in the services and manufacturing sectors. If your broker can give you a list of companies that consistently report higher EBITDA and margins, you can invest regularly through a systematic equity plan in these companies.

3. Identifying balance sheets low on debt

When interest rates are rising, Focusing on a company’s debt profile is as important as analysing its profit. You can analyse a company’s debt by looking at its debt ratio, debt to equity ratio and its debt to tangible net worth. Companies tend to borrow for multiple needs. If they raise debt to fund growth and create assets, it should not affect the business. However, if the money is raised to simply service previous debt or diversify into unrelated business, it could be a red flag. Do check with your financial advisor or the broker for a list of companies with low debt.

4. How to look for good managements

You need to be extra careful while buying stocks for your child’s future. In addition to studying a company’s financials, it is also essential to have an idea about its management. Promoter’s integrity is essential to protect the company from market risks. Generally, a lot of research and press reports is easily accessible. You may want to regularly read the management commentary every quarter in the conference call transcript or the annual report. A simple trend to track is the buying or selling of their own stock. If at every fall in the market, promoters buy their own company shares, it is a good sign. However, if you notice them selling the stock at every rally, it may not be such a good thing.

Related read: Finding Value in Midcap Stocks

5. Reinvestment of profits

It is a common practice to assume that high dividend paying companies are good. However, reinvesting profit into the business, a company can generate additional returns. When investing for your child, you may want to look for companies that reinvest profits for future growth. If you stay invested in such a company for 10 years, you could end up generating good returns needed for your child’s education. This is the mantra that Warren Buffett, the legendary investor lives by. You may want to use that to secure your child’s future.

Related read: Value Investing: How to identify cheap stocks

Read More:

• Stock Picking: How to choose good quality stocks for long-term investment Read more

• How to start investing for your new born child Read more

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Disclaimer: Investments in securities market are subject to market risks, read all the related documents carefully before investing. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. By referring to any particular sector, Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. Such representations are not indicative of future results.