Building a corpus to meet growing financial needs as children grow is no child’s play. Sample this. Tuition fee for under-graduation at IIT has jumped four times — from ₹50,000 in 2013 to ₹2 lakh a year in April 2016. This is an annual increase of a whopping 60 per cent. Proper planning to invest systematically is, therefore, essential to meet the ever-escalating education cost.
For the purpose of illustration, we assume higher education cost of ₹10 lakh and wedding cost of ₹15 lakh in today’s value. Inflation of about 8 per cent over the next one to two decades may be reasonable, going by past data.
Baby steps
In the first few years, when a child is born, you need to take a look at your monthly income and expenses. For example, the addition of one more person to the family may add to your monthly budget. You may have to find a larger home or change locations for bringing up your child. It is also likely that working mothers may opt to take a break from work. And when they restart work, services such as day care or nanny may be needed.
These may add to your monthly expense and reduce your monthly cash availability. Also, there are costs in admitting the child in a pre-school. So it is important to plan ahead and have a zone of comfort.
There is a time horizon of over 12 years to plan for higher education and 20 years or more to save towards wedding expenses. Given the long lead time, it would be advisable to move towards equity. Equity investments, when held for long periods, provide positive real returns (beating inflation). Investing about ₹14,000 a month in mutual funds that have the potential to provide 11 per cent annual returns will help you reach the goal of meeting higher education and wedding expenses.
With mutual funds, you have a varied choice of funds to choose from depending on your risk appetite. If you have a moderately high risk appetite you can consider diversified equity schemes with a large-cap tilt, such as Birla Sun Life Frontline Equity, Quantum Long Term Equity and ICICI Prudential Focussed Bluechip Fund. These funds have had a consistent track record of beating their benchmark and have delivered annualised returns of over 14 per cent over a 10-year time frame. In the last five years, these schemes have given annual returns of over 17 per cent.
Besides equity and fixed income products, gold and real estate are other asset classes to consider. Their share in the portfolio should depend on your requirements — if you plan to gift gold during the wedding, saving as gold may be a good option.
Shooting up
Education expenses — that includes fees, books, transport, extra-curricular activities — will form a sizeable portion of any family’s budget. There may be other monthly EMIs — for home loan or car loan, which may make putting away money for long-term goals a stretch. It is important to balance immediate expenses such as going on a vacation with saving for the future. As your income increases or you receive bonus or other payments, it will be good to consider investing the surplus.
The horizon for wedding expenses is still long, so equity tilt for this goal can continue. The portfolio can be reviewed periodically and rebalanced based on market condition, your risk tolerance (due to other changes in your financial position) and any changes in your target (based on the child’s education preference). The portfolio may be shifted towards balanced funds, if needed. Tata Balanced Fund, SBI Magnum Balanced Fund, HDFC Balanced Fund and L&T India Prudence Fund have, on an average, delivered 12-15 per cent over a 10-year time frame and can be considered.
Goal post
As you get closer to the life goal, liquidity considerations are important. For instance, if you had bought land or other real estate, it may be good to start thinking about selling it and holding the money in liquid investments. Likewise, as market conditions may be difficult to predict, systematic withdrawal from the market to liquid funds would be advisable. It is important to not invest in instruments that you do not fully understand. Just sticking to simple products can help you reach your goals without taking undue risks if you start early, invest systematically and review periodically.
You must also ensure that you have enough life insurance protection to cover any eventuality and provide for the goals planned for.
(The article was first published in Business Line.)