Last Updated on June 5, 2022
A reader asks, “Sir, my daughter just turned five. We have been investing here and there without focus or a target. Can you please guide us on how we can plan for her future? The first priority is of course her education until the PG level and her marriage”.
“We are aware of options like Sukanya Yojana, Sov gold bonds and mutual funds but we do not know how to use these. My husband wanted to buy Sov. gold bonds for her marriage but I wanted to confirm with you if that is a good idea. Please help us with a plan.”
Note: Some parents wish to fund only up to UG, some up to PG and some up to marriage. While it is admirable to expect our children to fund their PG and marriage (because we did it), we recommend planning for these as a contingency. If the child is able to fund this on their own, then you can add the sum to your retirement corpus! We also recommend not to let children start their careers with an education/personal loan if we can do something about it by investing early and investing right. Also, see, Should I invest for my child’s marriage?
Let us get the easy parts away first. Your daughter’s marriage is about 20-25 years away. Buying Sov gold bonds is a risk-free, tax-free way to accumulate for future gold purchases. However, over 20-25 years a good mix of equity and debt is less volatile and probably more rewarding. See Gold vs Equity (Sensex) 40-year return and risk comparison.
Also, who knows how marriages will be celebrated at that time?! All we need to buy gold or anything else at any time is cash and for any gold purchase above 10 years, an equity+debt mixture is desirable. There is no need to separately plan for this. This goal can be integrated with others.
Now, reg. Sunkanya Yojana and PPF, one of the first mistakes parents do are to open these accounts (as relevant; both in the case of girls) and invest as much as they can each year. This approach of chasing after “safe and assured returns” is a guaranteed way to not beat inflation and therefore fail.
Assuming you can fund your daughter’s school needs from your salary, you need to accumulate a corpus from which you will first withdraw 12 years from now for her UG. These will withdrawals will continue over the next 5-6 years covering her PG. Then her marriage expenses will probably be after a 3-5 years gap.
Our aim here will be to discuss the basics of how to go about planning this without any specific numbers. In the next part, we shall discuss a specific illustration. Part 2 is here: Financial planning illustration for a couple with a five-year daughter.
- Inflation for these goals would be high. Ten per cent increase in price every year is the lower minimum to use! Anything less is dangerous. Anything higher is safer but would mean you will have to invest a lot more.
- For the inputs assumed above, we recommend using at least 50% equity and 50% fixed income. The equity allocation will have to gradually lower after a few years.
- You can use the same portfolio for all three needs with progressive withdrawals.
- A simple Nifty or Sensex index fund will cover the equity component.
- The debt component requires careful consideration. If your child is a newborn (gender not relevant) and you have a full 15 financial years before school graduation, always go for PPF. You will have access to the full amount from her UG expenses. SSY only offers 50% liquidity and is not worth the “extra 0.5%” interest rate (especially when inflation here is so high). See: Sukanya Samriddhi Yojana vs PPF: An Illustration
- In this case, the girl is already five. So there are only 12 years away from college. So a new PPF will be less liquid than a new (or existing) SSY account*. A PPF can also be started in addition to an SSY account for future withdrawals.
- * PPF withdrawals are limited by 50% of the balance at the end of the fourth year, while SSY withdrawals are limited by the age of the child and education. Age above 18 and 10th standard is enough to get 50% of the current balance.
- Never invest more than 50% of your total annual investment into PPF + SSY. That is if you can invest Rs. 30,000 a month for all goals combined (it will probably be a lot higher if you compute, but let us go with this!), then that is Rs. 3.6 L a year. The total investment in debt should not be more than 50% of 3.6L or 1.8L.
- So the total investment in debt or PPF + SSY should not be more than 1.8L. Of course, you can invest a max of 1.5L in PPF + 1.5L in SSY, but that is irrelevant! If you fall for this trap and max both accounts, you are guaranteed to fall short of your goal corpus unless you have so money to spare to make up with equity. Also see: Why I maximized PPF investment only after ten years
- If you can invest Rs. 50,000 or more a month for all goals combined or 6L a year, then you can invest 3L in debt and max both PPF and SSY.
- If there is some additional money to be invested in the debt component then you can consider a money market mutual fund to keep things simple.
- Learn more about portfolio rebalancing and maintain the portfolio close to 50% equity and 50% fixed income for the first few years.
- Learn more about portfolio de-risking and gradually reduce equity allocation in your portfolio. This will also have the added advantage of preparing for yearly withdrawals from the first year of college.
- Our robo advisory tool can help you automate the above steps. You can consider each goal including retirement individually or combine them into a single portfolio. In the next part, we shall use this to generate an illustration.
The above steps will help you build a strong platform. It will also ensure that you do withdraw from your retirement corpus.
Part 2 is here: Financial planning illustration for a couple with a five-year daughter
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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