Mutual fund investments cannot be made in the name of unborn children
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Can I start a systematic investment plan (SIP) in the name of my unborn child? If not, can I do it as soon as she/he is born? Can investments be started in the name of minors? What is the best way to build a fund for my child’s future?
Mutual fund investments can only be made in the name of minors with a bank account, which in turn would require an identity proof of some sort (say, a birth certificate). As such, it would not be possible to invest in the name of an unborn child. However, you can start investing as soon as the child is born in her name. The best way to build an investment portfolio of this type would be to use one of the children’s funds offered by mutual fund companies, such as HDFC and Axis. There are several variants of such schemes, but given the long-term nature of these investments, it would be best to go for the most aggressive (read: the fund with the most equity exposure) of these funds.
I have a 1-year-old daughter. I want to build a corpus to fund her school fees, which would likely go out quarter or half yearly. The corpus should last 12-13 years and I want to build it through mutual funds. Would an equity-oriented balanced fund work or should I opt for debt funds? If I opt for debt funds, which ones should I invest in? Are long-term debt funds immune from interest rate changes?
Before we get into what kind of funds to invest in, you would need to do some maths to figure out how big your investment corpus should be, to fund your daughter’s school fees for 12-13 years. You would need to take two factors into account. One, the rate at which the cost of education is likely to go up in this period. Two, the rate of return that you could potentially generate from your investment corpus.
Both are, at the end of the day, assumptions about the future. But if we make reasonable assumptions, we can be reasonably confident about the success of our plan. For example, if: the school fees amounts to Rs1 lakh a year, education inflation is pegged at 8% every year, and we can generate a return of 10% from the investment; then you would need a corpus of Rs12 lakh to fully fund the school fees (assuming that funding for the subsequent year gets withdrawn in the beginning of the year). If the rate of return can go to 12%, you would need only Rs10 lakh, with the same assumptions (as your investment will grow faster than your withdrawal rate). Once you do this calculation, you will be able to determine of how much money your corpus should have, or can build within the next 3-4 years.
As far as fund choice goes, a balanced fund (equity-oriented hybrid fund) would definitely make a better choice given the long-term nature of your investment. Although you will be making regular, annual withdrawals, there will be significant amount of money left invested for a long period of time, and leaving a good portion of it in the equity market (as a balanced fund would do) would be the right choice. Also, balanced funds provide the advantage of having zero taxation for long-term gains, so you can withdraw from your corpus without incurring any taxes. To answer your question about long-term debt funds, typically these funds invest in debt instruments of longer duration (greater than 3-5 years), and as such any interest rate movement will have an amplified effect on its investments.
I have invested in the following schemes via SIPs—Birla Sun Life Balanced ‘95 Fund (Rs4,000), Tata Short Term Bond Fund (Rs4,000) and HDFC Mid-Cap Opportunities Fund (Rs4,000). Is my fund selection good? I plan to invest another Rs13,000 in mutual funds (Total Rs25,000). Which other funds should I pick or increase the amount in my SIPs?
Designing a mutual fund portfolio without knowing much about the requirements of the investor is a perilous task. I do not know your age, the time frame of your investments, or how much risk you are willing to take. For now, let me assume that you are a relatively young person, investing for the long-term, and have a moderate risk profile. If that were the case, I would try and bring some balance and diversification to your current portfolio. For the debt portion, you can use ICICI Prudential Short-term Fund instead of your current bond fund and invest Rs8,000 in it. I would also go ahead and add a large-cap fund (Franklin India Blue Chip) for Rs5,000 and a mid-cap fund (Invesco India Mid-cap Fund) for Rs4,000. Aside from these, you can also replace your current mid-cap fund with Mirae Asset Emerging Blue-chip fund for the same amount (Rs5,000). So, in all, that would make it a five-fund portfolio, with a 65% allocation to equities and the remaining in debt.
Srikanth Meenakshi is co-founder and COO, FundsIndia.com.
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