Building An Investment Portfolio For Your Child’s Future

[Child's Future Planning Series]

Session 5: Building an Investment Portfolio for Your Child’s Future

We are glad to have you with us for our 5th Session of Child's Future Planning series – and that is…

Building an Investment Portfolio for Your Child’s Future

“When it comes to investing, there is no such thing as a one-size-fits-all portfolio.”  -- Barry Ritholtz (an American author, newspaper columnist, and equity analyst)

And indeed, for every financial goal you address, a different portfolio is needed.

For your child’s future needs too––be it education and/or marriage –––an investment portfolio essentially should be crafted, with due respect to the investment objective, investment horizon, and asset allocation.

Charting an asset allocation plays a pivotal role to achieve the envisioned financial goals.

The objective is:
  • To clock decent returns over and above inflation; and
  • Earn potentially higher tax-adjusted returns
Check your risk appetite as a parent when building an investment portfolio for your child’s future needs. If the investment horizon before the goal realises is greater than 5 years, taking some calculated risk may be warranted as it can prove worthwhile, provided you select promising investment avenues.

Hence, the investment portfolio should be smartly designed. Replicating investments across the board for all financial goals (one size fits all) may not always be the best investment strategy.

Therefore one should systematically invest and also provide for a financial security blanket to cover any eventuality.

In this session we’ll explain how you can build an investment portfolio for your child’s future needs.

A Sensible Approach to Build an Investment Portfolio

Determine age of your child at the time of respective goals:

  • Child's Graduation - 18 years
  • Child's Post Graduation - 21 years
  • Child's Marriage – 26-27 years 

Generally we have seen  parents envisaging the requirement of funds for their child's graduation needs at 18 years of his/her age.

Assuming the child will take 3 years to complete his/her graduation, they want to plan for a 2 year post-graduation course at 21 years.

And finally, parents want their child to get married by 26-27 years.

This helps recognise the investment time horizon, or to put it simply, the number of years before a goal befalls or realises.

Here’s how you can calculate investment horizon:

Investment time horizon = Age at Goal – Current Age
Child's Current Age = 5 years
Child's Graduation Age = 21 years

So say, your child’s current age is 5 and you are planning to fund his post-graduation education at his/her age of 21, the investment time horizon in hand will be 16 years.

Investment time horizon helps you classify goals into:
  • Short-term
  • Medium-term
  • Long-term
This even helps prioritise while addressing to respective financial goals.

Once you know the investment horizon, assess the sum of money you would require to accomplish the financial goal today be it education and/or marriage and then extrapolate the future value taking into account inflation and investment horizon

When estimating the future value, it would be wise to be a little conservative by factoring inflation, particularly for education needs, on a higher side. This will perhaps get you to realistic figures.

Here is an indicative calculation…
  Current Cost Years to Goal Inflation Future Value
Graduation 5,00,000 13 10% 17,26,136
Post-Graduation 10,00,000 16 10% 45,94,973
Marriage 20,00,000 20 8% 93,21,914
Total 35,00,000     1,56,43,023
(This table is indicative and for illustration purpose only)

Say, you need Rs 5 lakh in current times to meet graduation needs of your child 13 years hence. Factoring inflation @10% p.a. for education, the future value of this goal will be approx. Rs 17.26 lakh.

Likewise, if you need Rs 10 lakh to meet post-graduation needs today, 16 years hence i.e. when the goal actually realises, taking into account inflation @ 10% p.a., a sum of approx. Rs 45.95 lakh will be required.

Similarly for your child’s marriage: assuming Rs 20 lakh is required today, 20 years hence a sum of Rs 93.22 lakh shall be required after accounting for inflation @8% p.a.

Once you’ve estimated the future value of respective goals – education, post-graduation, and marriage needs of your child, know the investment time horizon and classify goals into short-term, medium-term and long-term. Accordingly you can craft the asset allocation model for the investment portfolio.

Here’s how you can go about doing it:

Asset Allocation Model
Time Horizon Equity Mutual Funds Debt & Money Market  Mutual Funds Gold ETFs and Gold Saving Funds

0-5 years

10-15% 80-85% 0-5%

5-10 years

60-75% 20-30% 5-10%

More than 10 years

80-85% 10-15% 5-10%
(This table is indicative and for illustration purpose only. The numbers may change based on individual risk appetite.)

Equity as an asset class has the potential to counter the inflation bug effectively. And hence investing in equity mutual funds is one of the best investment avenues. If your investment time horizon is greater than 5 years, a dominant portion can be parked in a variety of equity mutual fund schemes.

If your investment horizon is less than 5 years or you are 5 years away from the goal, you should gradually move into debt mutual funds.

Likewise, make it a point to allocate some portion of your investible surplus in gold via gold ETFs for adequate diversification.

Note that when you invest in mutual fund schemes, selection plays a crucial role.

Recognising risk traits across categories of mutual funds and their suitability as per time horizon is essential:

(This table is indicative and for illustration purpose only)
(Source: PersonalFN)

Pay attention to the following aspects, amongst a host of other to select mutual funds:

  • Performance across market cycles
  • Risk taken to clock returns (risk-adjusted returns)
  • Portfolio characteristics
  • Investment strategy
  • Who is the fund manager
  • Cost involved: expense ratio and exit load
  • Investment processes and systems followed by the fund house

Finally, before we wrap our today’s learning session, here are a few…

Points to Remember…
  • Start planning and investing early to accomplish your child’s future needs. It will facilitate you to compound wealth better.
  • Determine your investment time horizon, and classify into short-term, medium-term and long-term.
  • Prudently estimate the future value of the goals.
  • Craft your asset allocation model astutely and keep revisiting it.
  • Select winning mutual fund schemes
  • Make sure your approach to build the investment portfolio is prudent. Don’t mimic your next door neighbour or friend.
  • Don’t forget to indemnify risk to your life as the breadwinner of the family
  • And last but not the least, if you don’t possess the skills or need expert guidance, seek help of a SEBI registered investment adviser who can handhold you to achieve your child’s future goals of education and marriage

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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