Investing in child plans
1. Time horizon. If you will not need the money in next 10 years, the equity allocation would be 80-100%. If it is 5-10 years, then equity allocation would be 50-70%. Etc. It really depends upon the age of your child and when you would approximately require that money. Say, if you child is 10 years old, and you may need the money at 18 years, then the approx. time horizon is 7-8 years. While, if the child is 3 years old, the time horizon will be 15+ years. 2. Your own investment psychology. The above allocations are kind of aggressive. You may want to tone it down by 10-20% from equity to debt. You may want to add Gold as some percentage.
ASSET ALLOCATION Plan to be Used and Managed:
- 1.When the goal is > 3 years away, keep the money in Basket 3 in the respective equity and debt assets (funds). This means keep 70% into equity and 30% in long term debt.
- 2.When the goal is within 3 years away, transfer the money into Basket 2 type of allocation. This means start transferring money from equity to long term debt asset.
- 3.When the goal is within 1 year, then transfer the money from both equities and long term debt to Short Term Debt instruments.
For you as an EXAMPLE, if the child is 3 years and you want to invest your 50 lakhs and use it for him/her partly for undergrad admission at 18 years (time horizon of 15 years) and rest at 25 years (say marriage or some other education degree). I also assume you have a fairly conservative kind of investment method.
- 1.Put all the money into an equity oriented hybrid fund (eg. Franklin Templeton Balanced / HDFC Balanced fund. Basically, any fund with a long good track record backed by a stable and good management team), in 1 go (or say in a short period of time of 3-6months). Keep the money in there for next 12 years.
- 2.At the age of 15 years of child, you migrate part of your money from that equity-oriented fund to a long term debt fund (in the same AMC) as per approx. need at 18 years. Eg. If we take a 10% annual growth rate (very conservative for this type of fund), you will have an approx. amount of 1.5 crore. If you want 80lakhs at 18 years, you will want to shift the entire 80lakhs into the long term debt fund for 2 years or so. While the rest 70lakhs will remain in the equity hybrid fund.
- 3.At age 17 years, you will shift the value of those 80lakhs from the long term debt fund into a liquid/short term fund and use it whenever you need.
- 4.At age 22, you shift the entire corpus from equity fund (approx. value of 1.1 crore @ 10% CAGR) to the long term debt fund. And at age 24, you shift it to a liquid fund/short term fund.
VARIATIONS / MODIFICATIONS:
- 1.If you have a slightly aggressive mindset (aggressive means you can undergo the deep cut associated with equity investments), you can use either a large cap fund (like Franklin Blue Chip Fund or HDFC Top 200) or a multicap fund (like Franklin Prima Plus or HDFC Equity or DSP Equity) instead of the equity-oriented hybrid fund mentioned above.
- 2.It is not necessary to use Indian instruments alone. You may want to use your own resident country's funds too. Say you are living in USA, then you can use their index funds and manage accordingly. The basic idea remains the same.
- 3.If you want to use a Ulip with a marketing name of “Child” placed in it (No, there is no major difference between a non-child Ulip or a Child named Ulip except as a marketing tool), so be it. Please do go through the Ulip primer to understand them first. The shifting across equity, long term debt and short-term/liquid debt instruments would remain the same in principle. There is one added advantage in the sense that the money will remain tied into that for the entire duration, which can be a good thing.
- 4.It is preferable to use Direct route to AMCs if you are clear about the entire concept.
- 5.One can take the help of a professional financial planner too for actual management of the instruments. The entire above thing will then at least guide you.
- 6.If the goal is single or multiple, the above example can be modified accordingly.
Some Major Questions which can be asked:
- 1.Why one equity / equity-oriented hybrid fund? Many people advise for 3-4 funds. The reason being a well-managed single fund gives enough diversification. Adding more funds does not increase diversification. On the other hand, multiple funds start to make the entire portfolio like a broad-market index, at the cost of active management. If you want, you can use an index fund too (eg. IDFC Index fund is one of the lowest cost fund, while Franklin Index fund is well managed too but more expensive). Also, in case of real reasons for changing over a fund, it is much easier to monitor and change from a single fund to another fund company rather than juggling around with 2/3/4 different companies.
- 2.Can Fixed Deposits be Used? They can be used in the end periods. In the earlier periods, because of adverse tax treatment of these (1. Taxable at marginal rate of tax, 2. Tax deduction at source and 3. Tax on accrual basis and not at the time of Realisation), I do not recommend it. The corresponding debt funds are much better in this respect.
- 3.Can PPF be used? As the debt asset part, it can be, if the goal is beyond 15 years.