A reader asks, How should I invest to secure the future of my newborn child?
Our investing mantra is process-first, products-last. We create a financial plan suited to our needs, considering realistic inflation estimates. Then, we consider the necessary risk for the goal, the risk we can emotionally handle and determine an asset allocation (mix of equity and fixed income) as a compromise between the two. Then, we consider product categories in each asset class and, finally, the products. Let us break down the task into steps.
- We need a target corpus to achieve after 17 years (or 18 years, depending on when she was born). That is after school graduation.
- Some parents ask, “But what about school and other coaching fees?”. This is best funded from monthly income, or you are in trouble! When we refer to the child’s future here, we will only refer to the UG fee, PG fee, relocation expenses, and marriage expenses if the parents see fit.
- Let us first set the target corpus = UG fee. The corpus can easily be enhanced to include other expenses. A UG fee of Rs. 1.5 lakh per semester x eight semesters + a joining fee of Rs. 5 Lakhs + another Rs. 5 lakhs for relocation, travel, etc., sounds right. You can make enquiries and set a target, too.
- So that is about Rs. 22 lakhs. Make that Rs. 25 lakhs as the current cost. That is, if your child were to enter a four-year UG program today, that is what it would cost approximately.
- What is the likely cost for your child after 16/17/18 years, as the case would be when we start planning?
- We will use inflation of 10%-12%.
- At 10% inflation, the corpus will be about Rs. 1.25 crores after 17 years.
- Suppose the parents can invest Rs. X each month for this goal. About 50-60% of X should be invested in stocks or equity mutual funds, assuming a post-tax return of 10% from equity.
- The remaining amount can be invested in debt instruments with a return of about 6%. Remember, this is not the return you will get the next year. This is the return you expect after 17 years.
- Now, let us answer your question: Which mutual fund category should I use to invest in a newborn child? A Sensex or Nifty 50 index fund is required for the equity part. We recommend an aggressive hybrid fund (treat it as 100% equity) if you want an actively managed mutual fund.
- But which debt instruments? We recommend PPF and debt funds for the daughter’s education and Sukanya Samriddhi Yojana (SSY) for her marriage (if that is important to you). Remember that you can withdraw 50% of SSY corpus for education only if the girl has turned 18. Many children get admitted to colleges before that. Also, there is only a 0.5 return difference between PPF and SSY. This is insignificant in an equity-heavy portfolio.
- For rebalancing and gradual shifting from equity to debt as the goal deadline nears, you can consider a money market mutual fund or an arbitrage fund (remember, returns do not matter here, just reasonable safety). Fund recommendations are available here: Handpicked List of Mutual Funds (Plumbline).
- The above-mentioned future target corpus is only for UG education. If you wish to include her PG education expenses, marriage expenses, etc., please modify them as required.
- What is more important is asset allocation after we start investing. We cannot hold on to 50% or 60% for most of the journey. A string of poor returns will upset our plans. By entering the above details into our robo advisor tool, we get 60% equity for 7-8 years and then gradually tapering to 0% for the rest of the journey. Many goal calculators input a single future return expectation to compute the monthly investment required. This is incorrect, as the asset allocation will vary.
Suggested asset allocation by the freefincal robo advisory template for a child’s college education 17 years away. - With this variable asset allocation, the total monthly investment required in the first year of investing is Rs. 15,500. Each year after this, the investment should be increased by 10%.
- Do not rush to invest Rs. 1.5L a year in PPF just because it is tax-free with a guaranteed return. In the above plan, the total investment in debt will only be Rs. 74 K. Until the equity allocation starts decreasing, as mentioned above, the debt investment will not exceed Rs. 1.5 L a year. After this, a debt mutual fund may be added to accommodate the higher debt investment.
- The above calculation should be repeated each year with updated inputs and assumptions.
All the best!
For other illustrations, see:
- Retirement plan review: Am I on track to retire by 50?
- I am 30 and wish to retire by 50; how should I plan my investments?
- Can I retire by age 55? Retirement Planning Case Study
- Case Study: Achieving Financial Freedom for Early Retirement
- How should I plan if I want to retire in 20 years?
- Is it possible to combine a bucket strategy with income laddering after retirement?
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Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
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