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Ask Mint Money | Invest regularly to build corpus for your child’s future needs

Ask Mint Money | Invest regularly to build corpus for your child’s future needs
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First Published: Thu, Jul 21 2011. 09 24 PM IST
Updated: Thu, Jul 21 2011. 09 24 PM IST
I have set aside Rs50,000 for my 13-month-old baby for his education and future expenses. So far I have not made any investment because I hardly know about good investment avenues. Kindly advise where I should invest this money in order to get good returns when the child is 18 years old.
—Manoj
It is good to know you want to plan for your child’s future early. There are many ways to build this corpus. A lot will also depend on how comfortable you are with risk. But since your investment horizon is 17 years, you can take some risk in the portfolio as growth rate in equity is higher than any other asset class.
However, what is also important is your risk-taking capacity. If you believe that you can take risk then you should consider equity-based mutual funds. You should go for diversified and hybrid equity funds. The options in the diversified fund space are HDFC Equity and Fidelity Equity. In the hybrid category, HDFC Prudence, HDFC Balanced and Birla Sunlife 95 Fund are good picks.
In case you are not comfortable with equity, the other option is to invest in long-term bonds or fixed deposits where the funds can be locked in for the long term. Another good option is to open a Public Provident Fund account. This gives you a healthy 8% tax-free rate of return. However, what you need to be careful of is that an annual deposit is to be made to keep the account active. This, in a way, is good as you keep saving some money every year for your baby. You can also go for a combination of the above mentioned products considering the risk-reward ratio.
To give you a better picture, 17 years from now (your baby is 13 months old), an investment of Rs50,000 at an annualized return of 8% will become Rs1.85 lakh, at 10% it will become Rs2.52 lakh, at 12% Rs3.43 lakh and at 15% Rs5.38 lakh. The numbers look attractive but they do not give the complete picture. What it does not speak about is inflation. The same money today will fetch you much more than it will fetch you 15 years down the line. The value of money will get eroded.
Hence, it is recommended that you should not be dependent only on this corpus for your child’s future. It is prudent and highly recommended that you should think of this corpus as the base amount, which you should top up every year. The idea is to save more and if your returns can make you remain above inflation, you have done a good job.
Surya Bhatia, certified financial planner and principal consultant, Asset Managers
Queries and views at mintmoney@livemint.com
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First Published: Thu, Jul 21 2011. 09 24 PM IST