Saving for your child’s future

Here is an effective investment plan for this IT consultant

Welcoming a new member into the family makes everyone happy. But along with the little bundle of joy come a host of responsibilities.

Planning and allocating resources for the long-term goals of children and saving early on will make the journey easy for both parents and children.

Chennai-based Harish, 35, who works as a consultant in a large IT services firm, wants to save for his three-year old daughter’s education and marriage. “My wife is a home-maker and my parents are financially independent,” says Harish.

Harish’s net monthly income is ₹90,000 and he spends ₹20,000 for his family, given that his parents also contribute towards monthly family expenses. He has a term cover and family floater health insurance cover provided by his employer.

Harish was a conservative investor until a couple of years ago and has only recently started investing in equity mutual fund schemes. “I was a bit wary of equities until a few years ago, but now understand that I need to increase allocation to equities to create wealth in the long term,” he acknowledges.

He invests ₹10,000 every month in equity mutual fund schemes through the systematic investment plan (SIP) route. The investment is spread across balanced funds — SBI Balanced Fund and HDFC Balanced Fund and diversified large-cap schemes — Aditya Birla Sunlife Top 100 and UTI Equity, and Mirae India Emerging Bluechip.

He has invested ₹5 lakh in bank fixed deposit schemes and the cumulative mutual fund investment till date amounts to ₹3 lakh.

He took a home loan of which ₹12 lakh is currently outstanding. He has been using the surplus money to prepay his home loan. He pays ₹27,000 on an average every month as home loan EMI. Harish will repay the outstanding loan amount in 43 months.

Harish’s daughter is in play school and will join regular school next year. The cost of higher education currently stands at ₹50 lakh. Adjusting for annual inflation of 6 per cent over the next 14 years, he will need to build a corpus of ₹1.1 crore by 2031, for his daughter’s higher education.

Assuming annual increase of 7 per cent in the investible surplus, Harish will have to invest ₹21,300 every month in the first year. Harish could consider investing in equity oriented balanced schemes, which can be expected to give an annualised return of about 10 per cent.

Besides increasing allocation to HDFC Balanced Fund, he can also consider L&T Prudence Fund (both of which have delivered about 18 per cent annualised return over the last five years).

Funding wedding

The second goal Harish wants to save for is his daughter’s wedding, which he anticipates will happen 20 years from now. At the current price, he estimates the wedding to cost ₹15 lakh. Assuming inflation of 6 per cent every year and increase in investible surplus by 7 per cent, the total corpus needed for the wedding works out to ₹48 lakh.

To build a corpus of ₹48 lakh by 2037, Harish will need to save ₹3,050 every month. He can consider parking it in diversified large-cap equity schemes, which can be expected to deliver about 12 per cent annualised return.

In the case of diversified large-cap oriented equity schemes, in addition to Aditya Birla Sunlife Top 100 Fund, Harish could also look at other large-cap funds such as ICICI Prudential Focussed Bluechip and HDFC Equity, which have delivered about 17 per cent annually over the last five years.

Harish can invest the remaining monthly surplus of ₹18,650 in a combination of large-cap oriented equity schemes and small- and mid-cap oriented schemes. Assuming that the investible surplus increases by 7 per cent every year and the investments earn an annualised return of 12 per cent, Harish should be able to mop up about ₹6 crore by 2042. This should help him meet his monthly familial expenses, post-retirement.

Harish plans to repay the balance loan of ₹12 lakh over the next 43 months. This will leave him with a surplus of ₹27,000 every month. Given that the current monthly spend of ₹20,000 is quite low and may increase going forward, the saving on loan EMI can be used to meet his monthly expenses. Any surplus after this can be invested in a combination of bank recurring deposits and sovereign gold bonds, the latter being more of a diversification strategy.

The writer is co-founder, RaNa Investment Advisors

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