I was blessed with a son this August. As is normal our child got gifted with some amount of cash as shagun on his welcome function. Generally what my family does is invest these amounts for new borns in a bank FD. What I wanted to do was invest some in PPF and the rest in an index fund such. I’ve been doing some reading online and am not able to form my mind. The time horizon is around 20 years. Simple calculation shows that if the money compounds quarterly @ 8.5% p.a. (PPF) then it turns into 5.37x times at the end of 20 years. But if it compounds annually at @ 10% p.a. then it turns into 6.73 times the principal. So I believe that I should split the money into three parts
30% in PPF (upto limit of Rs 1.5 lacs)
30% in FD
40% in Index fund
After some reading and some discussion in whatsapp groups I learnt that in respect of India index funds are not the best option when it comes to mutual funds for returns. But I’m happy with the return that Nifty has posted (from 100 points in '91 to 10-10.5K today) so I don’t want to be greedy and select some other fund (like small cap, mid cap) over index. I also don’t want to go for a cap specific or sector specific index. I would want to invest in an index like Nifty 500 or BSE 500. Kindly guide if this is the right thought. My other reason why I want to go for index fund is that it doesn’t require monitoring on my part and also the costs are low.
Kindly help me with throwing light over my thoughts and correcting me wherever I’m wrong.
Just my 2 cents… Since the child is just born, I would think the time horizon is 50 years and not 20 years. I am sure you will explain to the child at the right age that this is an investment you wish was bought for you when you were born and left till you reached 50 And these will lead to a happy retirement or middle age for your child if not sold until 50. Rest he can earn and spend himself once grown up but not touch this investment.
So I would recommend put this whole investment in the Index fund and not in FD’s and it should pay off in an unbelievable way in 50 years. Maybe Nifty 50 and Nifty Junior (Next 50).
Debt instruments like PPF and FDs etc are meant for preserving purchasing power of your investments and not growth. Returns on these instruments are generally only 1-2% higher than rate of inflation. Risk assets like equities and real estate generally earn about 3-5% more than inflation.
Moreover, inflation rate for a new born should be considered as 1.5x general inflation (about 10-12%, just my thumb rule). At this rate, your fixed income investments will lose value in terms of real purchasing power over time while equities should manage to maintain or grow real purchasing power of your investments.
Fixed income investment are good if you anticipate a possibility of premature liquidation of your investments anytime during your horizon (due to emergency, unexpected or unplanned expenses, other opportunities, etc). Equities are not suitable in this case as they may be trading below fair value when need for liquidation arises. However, for a new born probability of premature liquidation is low so fixed income investments are not necessary.
I have been doing this for over a year for my 15 month old. Though it is a very small time frame. I have some thumb rules in my mind (few similar to what @Yogesh_s is saying):
Only equity investing: Over the long term it is always better to be completely in equity, something on these lines is what Peter Lynch says in Beating the Street. No point investing in Fixed Income securities.
No Coffee Can: I don’t believe in this approach. At an overall level how much the portfolio is compounding at is all that matters. In this age of evolution and disruption you cant fire and forget.
Compounding portfolio: I look for businesses which will compound over inflation with low probability of getting disrupted. I will prefer higher cap stocks in this compounding portfolio (something like Yogesh’s thread on Nifty 50 portfolio). Also if I have invested in a business which will compound at a lower rate than inflation some other business must compensate for this delta in the portfolio.
Diversify: Have a fairly large number of stocks in this compounding portfolio (I personally have a dozen in this compared to 5 in my core portfolio).
Add consistently: Do not hesitate to keep adding to this portfolio provided you see undervaluation and the basic reasons for holding it is true.
Time: Last but not the least time is on our side in this specific portfolio. It is very difficult to think long term. The further you go into time the more hazy it becomes. Those who say a business will last forever are not transparent.
And pray to Lady Luck as always! All fund managers do
I had a slide in my Goa presentation this July which had my lessons. Pasting one below.
First of all Congratulations. In recent times, index funds have become popular in India. Primarily because of its low cost. Look at link below and compare yourself , how many ACTIVE funds have beaten the index in long time
Congrats! I would repeat what i suggested to my friend who was also blessed with baby boy recently. If you want to own something for 20+ years there is a simple and effective approach
Start an equity SIP in HDFC life and HDFC AMC stocks and don’t go lump sum yet. We will have savings explosion in this country in the coming decade whatever happens to this country and these two stocks will benefit tremendously but over the decade or so. Every other product has either high cost or low return. Index funds are also good but we are not US. We need to have a detailed study about returns from index funds in the emerging market environment over the longer term. I am little skeptical.
Hi. I had started buying shares in HDFC Bank and HDFC AMC in SIP mode for future savings. I invested in these companies as I am using the services of both HDFC bank (Salary Account) and HDFC AMC (my MF account). Till now I am happy with their services and hence is invested. I believe in a long run, these companies will give much better growth at least better than FD’s and debt funds.
@drgrudge it just feels so nice to read your post (esp. Thinking about the amazing possibilities and choices this can create for your little one!). My girls exactly two years old, and I just started investing on her behalf 6 months back.
Just a quick question on if you can open a joint demat acct on behalf of a minor? (unfortunately Zerodha said no - This was two years back though)
You can open a demat account but not trading account till she is 18 years old. You may gift shares or apply in the primary market (IPO). Edelweiss, Intime Equities and ICICI will open for minors. Generally they are hesitant since they don’t make any money here.
I like Motilal Oswal Multicap 35 Fund though thy are under performing in the recent days. MO’s philosophy of QGLP, Ramdeo Agarwal personal wealth is invested here and it is a multicap fund are my reasons to invest here. I will review in about 18-24 months.
Since we are going to invested for over 25 years we should not be worried much about the best fund/stock and invest in a disciplined manner so that we can fund her education, education and possibly even financial freedom.
I’m in Same boat as you. was blessed with Baby girl in Sep. investing only in Equity 100%. Will start in Sukanya Samruiddhi in 10 years (if rules haven’t changed by then and is still most attractive).
In Equity, I’ve started SIP in below funds (Equal weightage). My main reason of selecting these finds is that I don’t want to over-complicate things. Since the money will be invested for 20 years atleast am happy for it to compound at average rate (market returns ) even if it means slight under-perfomance vis-a-vis peers.
UTI Nifty50 index fund - Cheapest Index fund.
UTI Nifty Next 50 - Cheapest Nifty Junior fund, higher rish/return than above.
PPFAS Long term Equity - they take cash calls during bear market (overheated markets) so I don’t want to worry about asset allocation.
Lumpsum investment will mostly go to above or HDFC Mid-cap/Small cap fund (haven’t given much thought)
When you are planning for new born there are 3 main expense bumps
Admission to good school expenses - ( 3 years ) - PPF / FD lumpsum investment is right instrument for the same
Around 8th Grade - Coaching classes expenses - SIP in balance funds 70% Equity + 30% Debt -
Finally Graduate / Post Graduate / marriage expenses : SIP in 100% equity Mutual fund
Basic logic is upto 8-10 years equity returns can be volatile … Say in India 1994 - 2003 was one such period , in US 1928 - 1948 was another such period … but anything greater than > 15 years you can go with 100% equity plan
This is really a nice diversification. Due to goal based SIP calculators across the internet / AMC (Distributors) without proper knowledge or guidance some ppl putting all their money in equity mutual funds expecting they will get min 15% compounded interest without considering the risk factor like what if anything happens like 2008. If 2008 scenario happens they will not be able to fulfill their life based goals. It’s always advisable to have some part in safe fixed instruments and some in equity which will take care of extra % for attaining the goals.
Tax Aspects of Minor’s Income.
Taxation of the minor’s income should be kept in mind. In general, a minor is defined as one below 18 years,under the Indian Income-Tax Act, and minor’s income is clubbed with that of the parent. The clubbing is with the parent who has the higher income. Plus,there is a general income tax exemption of Rs 1,500 annually,under S.10(32) of the T Act, though that limit has been fixed many years ago,and may under review/consideration. This exemption is per child,up to a maximum of 2 children.
By investing in PPF, such clubbing provisions can be avoided.One can also invest in Tax-free bonds,as and when they open for subscription/sale.
Caveat. This is not a Tax advice thread,and it is best to take a CA/Tax Advisor’s advice,while making investments for a minor.
And these will lead to a happy retirement or middle age for your child if not sold until 50. Rest he can earn and spend himself once grown up but not touch this investment.
