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Invest prudently to secure your child’s future

Children are the biggest project and responsibility we grownups undertake. And in most circumstances, we stretch more than what our limits prescribe.

Invest prudently to secure your child’s future


Lakshmi Iyer 

Children are the biggest project and responsibility we grownups undertake. And in most circumstances, we stretch more than what our limits prescribe. But, frankly, with a little foresight, early planning and discipline, much of the expenses related to the child’s future, education and even marriage can be met with ease. (Though, I am of the opinion that children must be capable by then to manage that responsibility themselves.)

Start early

First, you need to start early. In fact, it would not be early if the planning and investment has been done and finished with by the seventh month of the pregnancy. That way, these non-urgent but important things are out of the way; and the real business of parenting can begin.

Yet, if you are late for that, then once the baby has been brought home and ritual formalities completed, it is the responsibility of the father (give mother some rest here, she is tired and nursing) to ensure that the saving and investment plan is ready. If you have missed even that period, start now.

The other thing is that investment should be through a joint folio account of both mother and father. This ensures that both mother and father have discussed a common dream for their child and the investment goal reflects that. This also ensures that both of them act as a check on any future indiscipline by any one of them towards the child’s investment plan. Psychologically also, this joint account separates your child’s investment plan from your other investment goals, such as retirement.

Also, take a low-cost term plan from a reputed company that has a high claim-settlement ratio with an accident rider. The thumb rule suggests that sum insured—the amount your nominee gets in case of demise --- should be 13 times your annual income. This takes care of any unforeseen trouble that may come up for the child, if the earning parent is not around. But this is not investment, but a protection cover.                       

Goal-based investment

What are the primary financial goals in a parent’s responsibility cycle? Parents have to bear expenses of child’s education from playway to school to college (even professional courses), expenses towards honing hobbies/talents of the child, and his/her marriage expenses. The lump sum outflows occur at the time of school admission, college admission, professional course admission and marriage.

Taking 4 per cent inflation into account, the school admission may cost a parent around Rs 1-1.15 lakh in three years, assuming the baby is born today. The admission to a professional college may need Rs 10 lakh (in 2032) and admission to a post-graduate professional college Rs 60 lakh (in 2037). And the cost of marriage may be around Rs 85 lakh by the time child has grown to be of 25 years (in 2042).

Now, that seems a daunting task. Isn’t it?  But a mere SIP of Rs 2,900 per month for 3 years in a balanced and/or accrual fund can meet the school admission goal (assuming 7 per cent internal rate of return (IRR))*. Likewise an SIP of Rs 2,500 per month in a large-cap fund for 15 years (assuming IRR 10 per cent)* can help fund college fees. Similarly, an SIP of Rs 6,700 per month in a mid-cap/mid-smallcap fund for 20 years (assuming IRR 12 per cent)* can help meet the admission cost for a post- graduate professional college. And, you may meet the marriage expenses through an SIP of Rs 4,500 per month in a midcap/mid-smallcap fund for 25 years (assuming IRR 12 per cent)*.

These commitments can be met easily with allocation into the mutual fund through the prudent asset allocation and use of SIP. One can also invest any amount s/he already has, or received regularly such as bonus payouts in a short-term bond scheme/ultra short-term debt scheme and then they can use a Systematic Transfer Plan to allocate the investment into the recommended funds.

I am advising mutual funds because they are a convenient, easy and beneficial route. They are one of the best investment tools with the lowest cost available in market. Among the key benefits of investment in a mutual fund is the potential of risk-adjusted return, objective-driven investment, professional portfolio management service, competitive investment costs, and potential tax benefits. The allocation depends on the risk, the timeline and the return expected. I have used conservative return estimates to achieve the returns from equities. However, the parents must monitor the portfolio’s performance from time to time and adjust the plan as and when needed.

Ed Asner once said that raising kids is half fun and half guerrilla warfare. And the fact is, even the half guerrilla warfare part is also fun. So invest well, invest wisely and enjoy the process.

*This is only an example. The actual performance may vary. Take advice from your investment adviser. The rate of returns assumed is only indicative. It does not guarantee actual return.  You will have to monitor your portfolio from time to time.

The author is CIO (Debt) & Head-Products, Kotak Mutual Fund. The views expressed in this article are her own.

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