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Mutual Funds can help you plan your child's future - Outside View by PersonalFN

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Mutual Funds can help you plan your child's future
Dec 1, 2011

All of us have the aspiration of offering the best to our children in their upbringing - be it their education, lifestyle, marriage etc. But if one indeed wants to fulfil these desires, effective planning is of paramount importance; because it will not be too long before your little bundle of joy grows up.

While most families have emerged as nuclear ones and feel liberated today (due to opportunities available across India as well as the other parts of the globe, along with rising purchasing power), our thoughtprocess in India hasn't really changed much. We still share the same strong emotional bonding with our children (aswe did when there were joint families), which urges us to give our children the best within our means.

But mind you planning is no child's play. It requiresvigilance and effort on one's partforassessingone's financial standing and financial goals (such as children's education, marriage etc.) because that would indeed help you pave a path for fulfilling your aspiration of providing a better future to your children. It is noteworthy that the entire process of financial planning involves steps right from identifying the financial goals, deciding on the asset allocation, reviewing the performance of the plan drawn, recasting the plan (if needed) and so on - just as youwould do, while you plan for your retirement. The purpose of this whole exercise is simple; to create a corpus for your children's education, marriage or broadly providing an adequate security during their growing years.

Today while opportunities have grown manifold, the cost of livingtoo has gone up exponentially. And while most parents do save regularly to provide better future for their children, saving alone is not enough in our opinion. It is imperative to savean "appropriate sum of money" systematically, which can enable you to create a suitable corpus for each financial goal - be it education or marriage of your children, and also provide a financial security blanket to cover any eventuality.

Very often one may think that it's too early to plan for children's future; but let us apprise you that it's never too early to start saving and investing regularly (an appropriate sum of money) if you want to provide good quality of education or even get them married in style. In fact the earlier you start, the better it is. This isbecause itleaves you with a greater time horizon to meet your financial goals - such as their education and marriage.

Today, say if a professional degree costsapproximately Rs 3.00 lakh,the same 20 years hence(when your child peruses professional education) would cost approximately Rs 12.11 lakh due to the rising cost of living (assuming an inflation rate of 7%). And that's not all. While you see little ones' grow you would also incur other costs as well, such as school fees, college fees, tuition fees etc., which again would depend upon what level of education would like to provide you child. Similarly, the cost of getting your children married too would escalate due to the rising cost of living.

For planning your children's future while the investment options are galore, selecting them is a daunting task. Moreover, you need to select an appropriate mix of various asset classes (such as equity, debt and gold) to optimally positionyour portfolio as you progress towards each of the financial goal set for your children's better future. For example, if you are many years away from a said financial goal (say funding your children's professional education), attributed by the fact of having started early to save; then you may take a greater exposure to equity as an asset class, since it can really help you create a substantial corpus to meet the financial - even after adjusting for the rising cost of living in the form of inflation.

While many would express jitteriness on investing in equity, evaluating the present volatility of the equity markets steered by the global economic turmoil; one needs to recognise and accept the fact that volatility would always be an integral part of the equity markets. It is for you investors' to manage the volatility of the equity markets prudently. And mind you managing volatility of the equity markets does not come from timing the equity markets, as this would result in engaging yourself in trading activity which can be hazardous to your wealth (as well as your health), and which may not help you reach the required destination of creating an "x" amount of corpus intended to meet expenses of your children's education and marriage. It is noteworthy that one needs to systematically stay invested in the equity markets, at least till 3 years prior to achieving the set financial goals. In fact mutual funds through the SIP mode of investing offered by themenable you to save and invest regularly, manage the volatility of the equity markets well (through rupee-cost averaging) and also power your portfolio with the benefit of compounding. Say for example, if you require a sum of Rs 20 lakh, 25 years hence in order to fund your child's wedding (in style), an SIP can help you achieve this goal, if you simply invest a sum of approximately Rs1,550 monthly for good 22 years, assuming you yield on an average 12% return year-on-year and you are shifting your money to debt instruments for the remaining 3 years (thereby refraining yourself from the taking the volatility of the equity markets).

But let wisdom prevail...

However, while selecting winning mutual funds in your objective of creating a corpus to meet your financial goals, youneed to be careful and not necessarily vie for fundswith a "financial planning" tag to them. Similarly, even sectoral / thematic funds should be avoided as they carry with them a high risk due to their trait of high portfolio concentration.Ideally, in your aim to achieve your set financial goals for your children's better future, you should opt for diversified equity funds as they comparatively less risky due to their characteristic of holding a fairly diversified equity portfolio. However, enough research should be undertaken in order to select winning mutual funds (in a market where there are more than 200 schemes); sincerespective mutual fund schemes follow a market capitalisation bias(of being large cap, mid cap, small cap, multi cap or flexi cap),and also adopt a specific style (i.e. value, growth, blend, opportunities etc.) while managing its assets.

Remember, it is imperative that you have a right combination of respective mutual fund schemes in accordance to market cap bias as well as the styles of fund management.But in case if you are a novice and / or conservative while taking a step forward by investing in mutual funds while planning for your children's future, then you can take defensive stance and opt for investing in pure or predominant large cap funds. However while selecting such a fund,apart from the past performance alone; one also needs to pay attention towards the following facets amongst others:

  • The risk the investor has been exposed to
  • Whether the fund(s) is able to justify the risk taken (in the form of greater risk-adjusted returns)
  • The fund's performance across market cycles (i.e. during bull and bear phases)
  • Comparative analysis of others mutual funds in the peer set
  • Investment processes and systems followed by the fund
These factors will enable you to select winning mutual funds while you plan to provide a better future to your children (within your means). Remember, it is imperative that you make prudent investment decisions, as you dream for your little ones' better future.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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