ET Wealth | Best investments for your daughter

Covid was raging and several parts of Mumbai were locked down, but that didn’t stop Sarika Sinha from giving her daughter the best gift a parent can. Last month, the Mumbai-based finance professional opened a Sukanya Samriddhi Yojana account for her daughter Praashvi. “I will put the maximum Rs 1.5 lakh in this scheme every year,” she beams. Financial planners say the Sukanya scheme is a good option for parents with daughters below 10 years. “The scheme offers assured returns so there is a predictable compounding of the investment every year,” says Prableen Bajpai, Founder and Managing Partner, FinFix Research & Analytics. “What’s more, the interest is fully tax free. Parents should not let go of this opportunity,” she adds.While the Sukanya scheme is indeed a good investment, the problem is that it may not be enough to save for the education that Sinha has in mind for her daughter. The scheme has a Rs 1.5 lakh annual investment ceiling. Also, it offers 7.6% interest right now, though this could change in future. Assuming an interest rate of 7.5% per annum, Sinha’s investments would grow to about Rs 46.5 lakh when two-year-old Praashvi is ready for college after 16 years. That’s a sizeable sum, but will fall well short of the targeted Rs 1.1 crore. Education inflation in India is very high, with costs escalating almost 9-10% every year. The Rs 25 lakh needed for college today would have risen to nearly Rs 1.1 crore by 2036.To augment Praashvi’s college kitty, Sinha and her husband have started SIPs in two equity funds and a hybrid scheme. They are putting Rs 12,500 a month in the three schemes. “We have assumed conservative compounded returns of 10% over the next 16 years,” she says. The investments would grow to around Rs 60 lakh in 16 years, complementing the Rs 46.5 lakh corpus of the Sukanya scheme.If you are also saving for your daughter’s education, use a mix of equity funds and debt instruments to reach your goal.Praashvi2 years, Mumbai 78332207Goal 1: Rs 1.16 crore for higher education in 16 yearsThe higher education that Sarika and Rockenjit Sinha plan for their daughter costs Rs 25 lakh today but its infl ation adjusted value after 16 years will be Rs 1.16 crore. They have opened a Sukanya Samriddhi Yojana account recently and will invest Rs 1.5 lakh in it every year. Since the goal is long term, they have also started SIPs of Rs 12,500 in two equity and one hybrid fund.Goal 2: Rs 2.17 crore for marriage in 25 yearsThe Sinhas are targeting a corpus of Rs 2.17 crore (Rs 40 lakh at today’s prices). For this very long term goal, they plan to start SIPs in a couple of equity and hybrid funds. Assuming compounded returns of 9%, they need to invest Rs 20,000 per month. If that’s high, they can start with Rs 12,500 a month and increase by 5% every year.Risk of rupee depreciationThe Sinhas have assumed education inflation of 10%. But the costs could escalate more for someone aiming at foreign education for her child. The depreciation of the rupee against major currencies will add to her burden.As a hedge against currency depreciation, financial planners are now advising such clients to invest in foreign stocks or buy funds with exposure to foreign markets. “A parent who plans to send her daughter abroad for education should have about 30% of her equity portfolio in foreign assets,” says Deepti Goel, Associate Partner in a Delhi-based financial advisory firm Alpha Capital.One can open an account with a foreign brokerage house or an Indian entity which facilitates such investments. Many such outfits have mushroomed in the past few months. Leading Indian brokerage houses also have tie-ups with foreign brokers.It’s much simpler to invest in ETFs linked to foreign indices. Motilal Oswal, for instance, has a Nasdaq ETF that is traded on the stock exchanges in India like any other share. All you need is a demat and trading account with a broker. Motilal Oswal S&P 500 Index Fund is an open-ended scheme that replicates the S&P 500 index. You could also invest in mutual funds with some portion of their corpus invested in foreign stocks. For instance, the Parag Parikh Long Term Equity Fund invests almost 25% of its corpus in US stocks, including Amazon, Alphabet and Facebook. But you will have to keep a close watch on these funds and the US markets.Early bird advantageWhether you are investing in fixed income schemes or market-linked options, keep one cardinal rule in mind: the earlier you will start, the easier it will be to reach your target. You will not only have to invest less, but won’t have to take very high risks with your money. Atul Tater (see picture) started saving for his daughter’s education when she was only one year old. He bought three life insurance policies that would mature around the time Anoushka was ready for college in 2022. “Fifteen years ago, it wasn’t easy putting away Rs 3 lakh a year,” he says. “But my daughter’s education was an important goal for us.”Anoushka16 years, Delhi NCR 78332214Goal: Rs 90 lakh for higher education in 2 yearsAtul and Preeti Tater started saving for their daughter’s education when she was only a year old. They have invested in a mix of traditional life insurance policies and equity mutual funds. Since the goal is coming near, they are gradually shifting their mutual fund corpus from equity schemes to debt and liquid funds.Tater realised that his insurance policies alone will not help. Life insurance companies use absolute returns very effectively by highlighting the huge maturity amounts of traditional endowment policies. The investor misses the impact of inflation. If we assume 5% inflation, in 10 years the purchasing power of Rs 10 lakh reduces to Rs 6.1 lakh. In 15 years, it is less than Rs 5 lakh.The maturity amounts seemed huge when Tater was buying the insurance policies, but inflation has reduced their purchasing power. So he also invested in a mix of equity and hybrid funds to boost the corpus. Though his investments earned good returns, Tater has been prudent in managing the risk. “The goal is just two years away so I need to reduce exposure to volatile investments,” he says. In the past one or two years he has gradually reduced the exposure to equity funds and moved to the safety of debt and liquid funds.Retired PSU manager G.S. Prasad (see picture) is also playing it safe with the Rs 25 lakh he has saved for his daughter Sunitha’s marriage. “About two years ago I pulled the money out of equities and put it in fixed deposits,” says the Bengaluru based retiree.Sunitha 25 years, Bengaluru 78332215Goal: Rs 25 lakh for marriage next yearRetired PSU manager G.S. Prasad started moving out of equities two years ago. His entire portfolio, including the Rs 25 lakh needed for his daughter’s marriage, is in fi xed income instruments. Unlike most parents, Prasad doesn’t want his daughters to follow the conservative allocation of his portfolio. Rather, he has advised them to invest in equity funds through SIPs.Enlighten and empowerApart from saving money for their education and other goals, parents can give something far more valuable to their daughters. They can empower their girls to become self sufficient in handling their finances and managing their investments. “A parent can transform his daughter’s financial life by teaching her the basics of personal finance. A child who learns about money management early in life is better prepared for the challenges in the real world,” writes Preety Pruthi, Director in MyMoneyMantra (see guest column).Financial empowerment will also help your daughter choose the right investments for her goals. Prasad advises Sunitha on financial matters and has introduced her to equity funds through SIPs. Though he is conservative with his own investments, he is not imposing his choices on her. Indeed, there’s no reason why the portfolio of a 25-year-old engineer earning a good salary should mirror that of a retired person. “I am looking for safety at 61. But at 25, her investments should be geared towards longterm growth,” he says.Financial literacy will not only protect your daughter against frauds and misselling, but even safeguard her rights at the workplace and at home. As Pruthi points out, no school or college teaches money management skills, so the responsibility is squarely on you as a parent to mould your child’s financial future. Don’t keep your daughter away from financial discussion in the family. Make her as much a part of money decisions as anybody else in the family.Thumbnail graphic by ET Prime/Muhabit Ul Haq

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