Investing right for your child’s goals

If you are an Indian parent, ‘dilemma’ is probably your middle name. When you aren’t in a fix over how to impart the right values to your progeny, you’re possibly fretting over how to ratchet up the corpus for his education and wedding. Which instruments should you invest in? Will these help build an adequate corpus for all the goals? Have you taken the right decision in picking Ulips, or should you have opted for the Sukanya Samriddhi Yojana? Perhaps real estate is the best investment, or should you just dump all your money in safe fixed deposits? If you are racked by such queries, you are not alone.

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. 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. 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 will be easily resolved.

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. “It is better to construct a portfolio with equity and debt mixture with respect to the tenure the investor has. For a longterm 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 midcap funds since both can offer sustainable growth,”says Dinesh Rohira, Co-Founder, 5nance. For medium-term goals, pick balanced or hybrid funds, which invest in equity and debt typically in 60:40 ratio. For short- term goals of 2-3 years, pick short-duration debt funds since they offer safety of capital and higher interest than a bank account.

Is education loan better than tapping retirement corpus?

It’s not without reason that funding of a child’s education is among the top worries for parents. A common mistake is not starting to invest at the right time, which is at the child’s birth. This invariably translates into a corpus that is insufficient for the goal. This is how parents end up expending all their financial resources, going to the extent of mortgaging their homes and risking their retirement to fund the kid’s education. “What if the child doesn’t support you later? There is no loan available for retirement and in trying to ward off an immediate problem, you invite another, bigger problem later on,” adds Rohira.

A good option is to take an education loan, since it keeps your retirement corpus safe, and the repayment process incurs a strong sense of discipline and responsibility in the child. Taking a education loan also offer tax benefit as the interest portion is eligible for deduction under Section 80E of Income Tax Act.

Should I buy real estate to fund my kid’s life goals?

It just doesn’t make sense to invest in real estate for so many reasons, feels Priya Sunder, Director, Peak Alpha Investment Services. You don’t know how it will grow given the low rate of return in the past decade or so, and may not be able to sell it when you need the money. So your plan of funding the child’s goals may go for a toss, says Sunder. Besides, there are various attendant charges that you incur, be it property tax, maintenance cost, high transactional costs, or capital gains when you sell it.

Instead of real estate, it would do the parents well to invest in a balanced fund, which will yield a bigger corpus (
see table). Even with rental income, the value of a house is bound to fall way short of the corpus that a balanced fund can help you amass in the same duration.

Should I buy a child Ulip or an endowment plan?

Ideally, neither should be in your portfolio as both are insurance plans. “None of these is recommended since parents are looking at insurance plans as an investment and one should not mix the two,” says Vyakaranam. In fact, “endowment and money-back policies are best avoided because these are obscure and give low 4-6% returns. So parents must not fall for child-specific insurance products and ‘child plans’,” says Amar Pandit, Founder, HappynessFactory.

It’s not the children who need insurance, but parents. A prudent option is to go for a combination of a term cover and mutual fund investment. Mutual funds offer higher returns and are transparent and extensively researched compared with child plans. However, if you are looking at securing and supplementing the mutual fund corpus while securing your child’s long-term goal, opt for Ulips. These offer safety of continued investing even if the parents were to pass away.

Should I invest in Sukanya Samriddhi, PPF or FD?

The Sukanya Samriddhi Yojana, PPF and fixed deposits are all debt instruments, which should be taken to dilute risk only if your asset allocation demands it. Though Sukanya is seen as a good debt option, PPF is definitely a better option.

Firstly, it is only for girls below 10 years and has an inordinately long term of 21 years. “The tax exemption at all three stages of investment, interest and maturity may seem attractive, but it may not be able to beat inflation. Besides, if the economy grows and rates fall, the high 8.5%rate may not sustain,” says Sunder. Another drawback is that if one starts investing when the child is 9, one may not be able to amass enough to meet the goals as one can withdraw only 50% of the savings when the girl turns 18. PPF, with its 15-year term and partial withdrawal option after five years, scores over it. As for fixed deposit, opt for it only for short-term goals because it offers low rate and the interest is fully taxable.

Should I buy gold jewellery for my child’s wedding?

There are so many obvious drawbacks to investing in physical gold that no expert recommends it. Vipin Khandelwal, Founder, Unovest, feels, “It’s fine if you want to gift gold jewellery at your child’s wedding, but I wouldn’t recommend investing in gold. For practical purposes, sovereign gold bonds are the best option,” he says.

This is because in addition to getting the market price while selling the bonds, you also earn an interest of 2.5% per annum. You also do not incur any cost for storage or pay capital gains tax if you hold the bond till maturity.

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