Asked and Answered: Investment Options for Children-related Goals

A reader writes-in:

Hope you are doing good. Need your ideas on saving for my child’s future.

I have made a few investments for my kid’s education. But these are long-term investments which will give returns only after 18-years. In addition to this, I would like to have investments allocated exclusively for my child. These investments must be utilized for ongoing school education and also for meeting irregular/unforeseen child expenses. The investment scheme must be flexible enough to withdraw a partial amount at any moment and must also give good returns. I believe that I am a disciplined investor.

Is investing in a Balanced Fund the right option?

Kindly suggest if you know of any other investment plan that will cater to my need.

And here’s what I answered:

For me, questions regarding investments for children-related goals are tricky because D and I haven’t reached that stage of life yet. But I’ll still give this a go (some of my advice comes from the discussions that I’ve had with my sisters regarding investment options for their kids). I’ll also throw-open your question to other readers on the blog since they might be in a better position to answer.

That said, here are my thoughts:

[Caution: Some general investment advice to begin with.]

For any financial instrument, there are three factors:

  • Investment Liquidity
  • Perceived Risk
  • Expected Return

It’s generally impossible to optimize for all three in one go. If there was such an instrument that has high liquidity, low risk, and high rate of return, we’d all be in the queue to pick (no, grab) a piece of that instrument. You need to always keep this in mind — plus the fact that each of these three factors are subjective (what’s liquid or low risk to you might not be so to me) — when picking-up an investment option.

Coming back to the question on hand,

I think you can split your goals for you child’s ongoing education/expenses into two: short-term ones such as paying for school expenses each year and long-term ones (3- or more years away) such as saving-up for your child’s higher-education. I couldn’t think of any medium-term ones exclusively pertaining to children (Donations? Building Funds?).

With such a split, here’s what my investment approach would be:

For the short-term ones, go for a simple Recurring Deposit at your Bank.

Example: If annual school fees are approximately Rs 60,000, open a 1-year Recurring Deposit with an automated monthly payment of Rs 5,000. While it’s possible to mathematically optimize the Rs 5,000 such that you precisely have Rs 60,000 at maturity, I’d refrain from doing so because the extra cash (in the form of the annual interest earned) will act as a margin of safety.

For the long-term goals (3- or more years away), I’d go with either a pure-Equity fund (such as HDFC Equity or HDFC Top 200) or a balanced fund (such as HDFC Prudence or HDFC Balanced) (growth options).

I’m personally inclined towards the balanced fund route. But if you have time on your side, you could start with a pure-Equity fund and two-thirds of the way in start switching out to a balanced fund. But whatever you choose, do review your investments at least once every quarter. The balance in this kitty can also serve towards unexpected expenses incurred towards your child.

Having put across my thoughts, I’d like to now throw it open to you. What do you think of this plan? Can you suggest a better plan based on your experience?

Bonus reading material:

Here’s a great article (unrelated to the subject on hand but has some really good takeaways) that I came across. I particularly liked this statement:

I’ve also learned some things about Risk. Risk is an arbitrary concept, until you experience it. And I’ve noticed myself focusing more on the consequences of something going wrong than just the probability of that happening. As a result, I tend to urge my clients to make decisions that err on the side of caution.”

Leave a Reply