Early start, systematic investment key to planning children's future

Designing a meticulous financial strategy to build a corpus for your child is a task that is seldom addressed with the earnestness it calls for. While some of us leave investing to the last minute, others tend to rely on half-baked plans that almost always fail to manifest the desired results. While it isn’t very complex, it is the unknown factors that often keep most of us from delving deep into it. Here’s taking a look at how the agenda can be strategically pursued.

Don’t forget inflation

To achieve the targets set for your child, calculate the potential future value of the corpus required after adjusting for inflation. This will save you the right amount of money. The goal being long term, go in for equities. These deliver higher inflation adjusted returns than any other asset type.

For example, a wedding that costs Rs 25 lakh today, would cost nearly Rs 70 lakh 21 years from now at an assumed inflation of 5%. Now, assuming that equities generate a return of 12% for the next 21 years, estimate the monthly savings for the purpose. Similarly, you can calculate the monthly savings you need to make for your child’s higher education.

The right mix

You may want to stick to large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. They give reasonable gains when equity markets rise and are also comparatively less volatile when equity markets fall. A little exposure to mid-cap funds, which are known to give sudden spurts in their performance along with high-risk funds, such as thematic funds, can be considered to get the kicker in returns. You may, however, have to increase your portfolio review frequency. The idea is to take the equity advantage and yet control the risks you take.

Choose well-performing equity schemes with an established track record. A more passive way is to choose Exchange Traded Funds and index funds, or a mix of both. Simultaneously, open a Public Provident Fund account in your child’s name.

The selection

If you are in for the long haul, assess the targeted Mutual Fund schemes on the following criteria. Look at the fund’s long-term performance. Consistency pays in the long run and matters most when the final corpus is considered. The performance of schemes within the same fund family may vary as they are run by different managers and have different portfolios. Hence, take a close look at the targeted scheme’s performance, its portfolio and the investment strategy that the scheme follows. Do not necessarily choose child-specific MF schemes.

The approach

After estimating the monthly savings required and identifying various MF schemes, the right approach is what matters. Systematic investment plans (SIP) involve investing a certain fixed amount of money at regular intervals rather than investing a large clump. This form of investing suits those who cannot invest in clump, but can invest regularly. This way you don’t capture the highs and lows of the market. Rather, the cost of your investment is averaged over a period of time. The essence of Chips is that when markets fall, investors automatically acquire more units. Likewise, they acquire fewer units when the market rises. Therefore, the average cost per unit drops down over a period of time. It helps forced savings and doesn’t make you scramble for funds at the last minute. Further, part of the money your child gets in, say, birthday gifts, could also be invested in these FMs.

The re-balancing

Monitor the performance of your portfolio and keep re-balancing it regularly. An easy way is to divide the fund balance into 36 enlistments and then execute the Systematic Transfer Plan. For instance, from a balance of Rs 10 lake in an equity MF portfolio earmarked for a child’s needs, approximately Rs 27,000 will get transferred each month into debt or liquid fund over three years.

Lastly, you must also start the de-risking process about three years away from your goal, be they your child’s education or wedding. Moving funds out of equity FMs is best done through a Systematic Transfer Plan (STP) into a debt MF scheme, preferably of the same fund house. Through an STP, you can shift funds out of equities and into debt on a regular basis, thereby creating a corpus that is less exposed to volatility. This will give you a staggered approach to the shifting process and be the final key to unlocking the potential of smart investments for successful rationalist of your child’s myriad goals.

SAVE SMARTLY

• Take into account inflation while calculating the corpus
   
• Take the equity route as it is a long-term investment
   
• Choose multi-cap mutual funds to address market volatility
   
• Regular rather than lumpsum investments will help average out the cost

The writer is national sales director, Franklin Temple Investments