How do I invest an inheritance and pass it on to my daughter?

A reader sent us the following question.  “I’m an aspiring DIY investor and frequently read your posts on freefincal. I have also attended the goal-based learning tutorials on freefincal and found them very useful”.

“Most of the analysis and approach I have read is on systematic investment planning. My question is, “How to plan, monitor and manage a lump sum DIY investment strategy”.

“To put it in context, I’m 53 years old, and by God’s grace, I can fend for my family’s present needs, my child’s education and retirement needs. I inherited wealth from my late father, who passed away a few months back. As a custodian of this inheritance, I would like to grow it and pass it on to my two-year-old daughter after 20 years. Could you point me to any existing content or advise me on how to manage this intelligently?”

There are two considerations here:

1. Are you sure you do not need this money for your future goals? If unsure, validating your investment strategy (excluding this inheritance) with a SEBI-registered fee-only financial planner may be a good idea.
2. How much capital market experience do you have? In other words, have you invested in equity or equity mutual funds long enough to appreciate their risks? Are you comfortable with debt mutual funds?

We will assume that the answer to the first consideration is, “you are sure”, and proceed.

Suppose you do not have capital market experience. In that case, your portfolio does not have much equity or debt funds; professional help from a SEBI-registered fee-only financial planner becomes crucial to gradually deploy this amount into the market – the extent of which can be discussed.

If you are comfortable with the capital markets, then we recommend the following:

• Choose equity exposure from 50% to 70%. The rest can be in fixed income.
• For equity, a simple Sensex or Nifty 50 index fund would suffice. This will ensure there is no need for performance reviews. Depending on your comfort level, you can split the investment among 2-3 index funds.
• If you like to add some active funds, aggressive hybrid funds can be considered.
• For the fixed income, there are many candidates.
  • You can create an all-weather debt fund portfolio using short-term  (money market funds) and long-debt fuds (corporate bond and gilt funds).
  • You can set up a 10-year FD in a safe (meaning too big to fail) bank since the rates are reasonably good now.
  • A PPF account in your daughter’s name (assuming you already don’t have one for college fees etc.) The annual subscription can be paid by redeeming from the money market fund, or you can set up a short-term FD for the first few years or even use an arbitrage fund to lower the tax incidence.
  • Conservative hybrid funds can also be used.

This portfolio should be reviewed annually and rebalanced if the asset allocation deviates by more than 5% on either side.

Deployment: This is perhaps the most important consideration. If the inheritance is lesser than your net worth, then it can be invested in equity and debt funds rather quickly – money market in one shot, gilts or corporate bonds over a few months and equity in, say, six months.  If the inheritance is much higher than your net worth, these timelines can be extended more, say over 12-18 months.

If you do not have capital market experience and the inheritance is substantial compared to your net worth, starting with only a 10% to 20% equity allocation would be best. This can be gradually increased.

Even if you have significant capital market experience, never make the mistake of going overboard into equity. A balanced portfolio (even 50% equity and 50% fixed income) will get the job done.  This is as far as my thinking takes me.