Last Updated on January 31, 2020 at 11:41 am
My son turned 10 a few days ago. I have been investing for his future since Dec 2009 – a month before he was born. Here are some lessons from this journey.
Many years ago, I asked a question in the Jagoinvestor forum, “if anyone has achieved their financial goals using mutual funds, please share your experience”. To this Manish responded, “it is unlikely that any forum member would have done this”. So I told myself, “let me be the first person I know to have done this”. I am not there yet, but let us just say that the asking rate is comfortably low.
When I started investing for this goal, money management basics were almost in place, except for term insurance which I got a few months later (March 2010). So from day one, investments were made with asset allocation in mind – 60% equity and 40% fixed income. Contrast this with how most of us (including me) plan for retirement: heavy on EPF/PPF and trying to catch on the equity exposure for several years.
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During the last trimester of my wife’s pregnancy, I started thinking about how to start investing for the child. We are victims of our own experience. It took me a good 14 years after school to land in a “permanent position”. Although my father retired in 1997, and my mother in 2002, both with meagre salaries, they never pushed me to get a job,
So I wish the same for my son. Hence this post: What if our children never had to work! Very few people (Subra being one of them) understood what I wanted to say there. I believe parents should provide a strong, wide platform for children to blossom, find themselves and even experiment after school.
So, after a rough estimate of UG + PG education, I decided on a target corpus of close to one crore when my son finishes school. Ten years on, this has not changed much (and my actual corpus is not anywhere near). As of now, my son would like to explore (surprise, surprise!) a career in science ahem physics/astronomy. Let us see how this changes.
Exploiting the fungibility of my mother’s cashflow with mine, I opened a PPF account for her. This doubles as a tax-saving instrument for me and as the fixed income component for my son’s education goal.
As her health worsened, I had to consider the possibility of premature closure of the PPF account. So I opened one more in son’s name. I neither claim these as “good decisions”, nor do I recommend that. Just stating facts.
To this day, both PPF accounts have never been maxed. That is total investment per account, per financial years is nowhere near Rs. 1.5 Lakh. If I had done this, the first casualty would have been asset allocation. So I preferred to pay some tax for my mother.
For the equity, first, a SIP in HDFC Top 200 was started. A couple of years later I added HDFC Prudence and ICICI Dynamic Fund (now multi-asset). The Top 200 was shifted to Prudence and Mirae India Opportunities was added at some point. Again merely stating facts. Unlike what many think, no complex calculations were involved in these decisions. Initially, I was planning for his marriage expenses separately but later on merged it with the education goal.
Readers familiar with my yearly financial audits may recall the equity portfolio (updated Jan 30th 2020)
- HDFC Prudence. XIRR 12% Weight: 29%
- Mirae Large Cap Fund XIRR 12.5%. Weight 37%
- ICICI Dynamic (ICICI Multi-asset fund) XIRR 12% Weight: 36%
- Overall portfolio XIRR 11.6%
I have been able to keep the equity allocation close to 60% all through these years. Rebalancing a total of five times – three times into the PPF account and twice into an arbitrage fund (ICICI).
Lessons in this 10-year journey
- Time is crucial. I had a full 18 years before he finishes school (because he is Jan-born). Starting allows us to take significant portfolio risk. This applies not just to the initial phase of the investment, but also in the latter half.
- Luck is crucial. I have not seen a major market crash in this period.
- Goal-based rebalancing/re-alignment is crucial. I have been able to gradually allocate an amount equal to current PG expenses over the last few years. This allows me to have a high equity exposure in spite of sequence of returns risk.
- Increasing the amount invested each year is a huge factor. I am investing three times as much as what I did in 2010. That is a 11.6% year on year increase in the investment amount. This is the hardest. Luck plays a big role here. Any big expense or break in employment can make things difficult.
- Focus is important. Focus on inflation first. Even 10% is an underestimate here. In spite of that, we see people asking, “is X child plan good? The “where to invest” question should start here.
- investing each month based on a system is systematic investing. This investment can be manual or automated but must be based on a plan. Merely automating when money will be debited from a bank account is called SIP.
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