Earning My Money

All parents dream of fulfilling all the requirements and desires of their kids. They want to give the best to their juniors. Best of education, best of toys, best of health, best of everything! The only problem with these best things is that these have the best (read expensive) price tags too!

Let's take education as a case. After paying Rs. 2,000 to Rs. 5,000 per month in play school, a father takes his kid to the best private school in town. This school makes him forcefully pay huge sums of donation, though donations were meant to be paid wilfully. After this donation which runs into a few lacs of rupees, every month the parent is required to pay tuition fee of his/her kid, which may be again around Rs. 2,000 to Rs. 4,000. And, if the parents have chosen an air-conditioned, well-built school with all upgraded infrastructure facilities, then the monthly outgo maybe around Rs. 7,000. But what can a father do, after all it is about the child's future. Or is this really the case? Maybe something could have been done. Some financial planning and some investment based on such a plan, perhaps? A cynic says this of planning - "planning might not yield best results but saves from the worst ones!".

But what is special about investing for kids, one may ask. After all it is just money to be saved and invested. However, investment is not just putting aside some x amount of money in a trading account with a broker and have it invested in any x-y-z security.

Broadly speaking, investment can be said to be a function of purpose, duration and risk tolerance. Let us put this in perspective with investment for children.

The purpose for kids could be - secondary education, higher studies (in India or abroad), marriage, house, other facilities like car, etc. So one has to enumerate what all is required to be catered to. Each of these items has a cost - some cost many more times than other. Take higher studies for instance. A typical coaching institute may charge anywhere between Rs. 1-2 lacs for say, an IIT JEE exam. A good car may cost Rs. 5-7 lacs. Providing a house is another challenge in itself with housing prices increased exponentially in past five years, especially in metros like Mumbai, Delhi, Bangalore, Hyderabad, Haryana and so on.  A simple 3 BHK flat in a nice locality now is a matter of about Rs. 50 - 90 lacs. But these are current cost estimates. Imagine what these figures will grow into when inflation adds in them for so many years. Going by our above estimate for cost of car of Rs. 5 lacs and an inflation estimate of  say 5%, the cost after 25 years stands at Rs. 16.93 lacs. By now, one must have figured out that it is not a cake walk preparing for such needs.

Duration depends on when planning is started. It is no-brainer in investment world that the sooner we start, the better it is, and for a very basic reason - the magic of compounding. Think of a parent who started planning for their kid even before it was born and begun investing when the little one arrived. They had a pretty long time (about 18 years for higher studies and 25 years for marriage and house). With such a long period one can think of an equity skewed portfolio. Even though this couple might face some black years like 2008, it can still work out to a respectable net worth at the end of 18 or 25 years. Imagine the couple saved Rs. 40,000 a year for their nestling. It could have Rs. 33.88 lacs after 25 years, taking annual return of a meagre 9%.

Lastly, risk tolerance is what varies with one's portfolio duration, value, liabilities and return expectations. But in case a couple is looking for such a big time horizon (more than 15 years), risk tolerance should cover all other variables. Equity investments, as shown by countless researches, are best suited for long-term investment durations.

Based on the above analysis one may look at various financial products available in the market. Looking at investment options that provide more exposure to equity is something one should look for. For passive investors, those who find stock symbols like chemical formula, investing directly in equity mutual funds, exchange traded funds (these replicate the performance of an index) could be a preferred option. Also to reap benefits of tax allowance on investments and their disposal, one can allocate some amount to products like Public Provident Fund.

As a matter of prudence one might think of withdrawing investments from risky products to safe ones, just before the requirements arise. Say, disposing off the equity investments just when the junior is 16 or 17 and putting the money in MMMFs or debt funds or fixed deposits. This practice shall definitely bring the return during such period down but can assure reasonable safety of principal.

Vivek Kumar

PGDM,2nd Sem