Most parents blindly feel their way through the investment terrain, randomly putting their money in a disparate set of instruments guided by ignorance and wrong advice. “They make so many mistakes, right from waiting too long to start investments, to not investing consistently, from not securing their own health and lives with insurance, to not having a clear idea about the goal values,” says Priya Sunder, Director, PeakAlpha Investment Services. The result? Inadequate corpus for goals, or worse, risk to parents’ retirement corpus.
Little wonder then that there was a Rs 4.15 lakh shortfall between what parents contributed and what students claimed they spent on education, according to the HSBC Value of Education Survey 2018. Nearly 61% of parents also wished they had started saving earlier for the goals. As per another study, the 2017 Birla Sun Life Insurance Company Protection Survey, saving for kids’ education was the top worry for nearly 35% of the 1,540 respondents.
The first step to building a sufficient corpus for your children is to frame clear goals, with defined future values that take inflation into consideration. Then fix correct time horizons for these goals. It’s the time frame and risk associated with proximity to goals that primarily decide where you invest: if there is enough time to reach the goal, invest in equity, but if you have little time left, opt for debt.
The second step is to build a portfolio with the right asset allocation—optimum mix of equity, debt, real estate, gold—to ensure growth and safety of your investments in keeping with your age and goal horizons. Finally, pick the instruments that fit into this asset allocation. You can either pick a bunch of equity and debt instruments separately, or invest in mutual funds, which have an inbuilt equity-debt combination to suit your risk profile.
Once you understand this basic investing process, all your dilemmas regarding instruments will be easily resolved. So as you fete your kids this Children’s Day, go through the six questions in our cover story and understand why you should pick one instrument over another.
Q1. Which mutual fund should I invest in for child’s goals?
Most people have the discipline to start investing but find it difficult to continue. “So automating investments is a good idea and mutual funds are the best instruments to do this,” says Sunder. They offer funds for all goals—short-, medium- or long-term—but the wide variety means that one should know which funds to use for which goal.
“It is better to construct a portfolio with equity and debt mixture with respect to the tenure the investor has. For a long-term goal, it is better to have investments inclined towards equity, whereas for short-term goals, have more exposure to debt,” says Nitin Vyakaranam, Founder & CEO, ArthaYantra.
For long-term goals of over 8-10 years, equity funds or diversified equity funds that invest nearly 80% in equity, can be considered. This is because these will give high returns of over 12% and the risk is virtually negligible after 10 years. “One can opt for a mix of large- and mid-cap funds since both can offer sustainable growth,” says Dinesh Rohira, Co-Founder, 5nance. You can also go for an ELSS, which is a diversified equity fund. It offers tax benefit under Sec 80C and has a lock-in period of three years