- 2 years ago
When it comes to wealth creation for children, when should one start? What schemes should one invest in?
Credence Family Office's Kirtan Shah and Moneyeduschool's Arnav Pandya discuss that and more.
Credence Family Office's Kirtan Shah and Moneyeduschool's Arnav Pandya discuss that and more.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Hi.
00:08 Thanks so much for joining in.
00:10 You're watching the Mutual Fund Show on NDTV Profit,
00:12 and my name is Alex Matthew.
00:14 Often, this show and the ideas that
00:17 emerge for the topics on this show are driven by real life.
00:22 And incidentally, a colleague of mine
00:24 was speaking to me the other day and said
00:26 that she wanted to plan for her newborn child.
00:31 And of course, the child was born just about a month,
00:34 month and a half back.
00:35 But she thinks that if she gets a head
00:37 start on the investments that she makes now,
00:41 it will hold her and her child in good stead 15, 17,
00:45 20 years down the line.
00:46 And so to that end, I said, why don't I do a show?
00:49 And I speak to experts about what
00:52 they would suggest the right approach is
00:54 to which mutual fund schemes to invest in, and perhaps also
00:57 which instruments outside of mutual funds
01:00 to use to supplement an overarching portfolio.
01:03 If at all, there is a certain amount
01:05 of risk that needs to be taken on behalf of your child,
01:09 what is that level of risk?
01:11 I'm joined today by Kirtan Shah, MD of Credence Family Office,
01:16 as well as Arnab Pandya, founder of MoneyEdu School.
01:19 Thank you so much to the both of you for taking the time.
01:22 And as always, it's a pleasure having you on the show.
01:25 Kirtan, I guess the first question is, when do you start?
01:28 My colleague, as I mentioned, her child
01:31 is just about a month, month and a half old.
01:34 Is this the right time?
01:36 Alex, thanks so much for having me on the show.
01:38 I think your colleague is correct when
01:40 she feels that she should start as early as possible.
01:43 Because the earlier you start and more of the time
01:46 you really have in terms of accumulation,
01:49 you really will be able to compound your money much faster
01:53 or the other way around might have to save much lower
01:57 to reach the same goal.
01:58 So to give you an example, if your colleague starts right now
02:01 and assume that she typically wants
02:03 to plan for a child's post-graduation, which
02:07 will happen when the child is 21 years,
02:10 and probably she's looking at accumulating a crore,
02:14 and you assume that the returns that we'll
02:16 be able to generate is 5%, then she might only
02:20 have to do 9,600 of SIP every month
02:23 to be able to reach one crore at the age of 21.
02:26 But let's say if she does not start now
02:29 and starts a little later, or somebody else's example
02:32 who's not started now and the child is already
02:33 five years old, now you would only
02:35 have 16 years to accumulate one crore, which
02:39 is at the age of 21.
02:40 You will have to increase your SIP, which
02:43 was in the first case 9,600 to 18,300 now.
02:46 And let's say if you started 10 years when the child is 10
02:49 year old and you only have 11 years to go to accumulate
02:52 a crore, you will have to do 38,000 rupees of SIP.
02:55 So I'm completely with your friend
02:56 when you say that should she start right now?
03:00 The answer is definitely a yes, because the more time
03:02 she really has to achieve that particular goal,
03:05 she's going to be able to do it at a much smaller SIP.
03:09 I mean, just to put things in perspective,
03:11 you would have to save four times the amount
03:14 if you start 10 years late per month.
03:18 And that's quite significant if you think about it.
03:20 And ultimately, I think people tend
03:22 to forget, Kirtan, that they have to save for themselves
03:26 as well as their children.
03:27 So the later you push it, you'd have
03:29 to sacrifice on your own savings.
03:32 Is that right?
03:33 Is that the right way to look at it, Arnab?
03:37 Definitely.
03:38 Because ultimately, every individual or a family
03:42 has a limited amount of money.
03:44 Now, you have multiple goals for your own retirement,
03:48 for your own spending.
03:49 Plus, when you have responsibilities of the child,
03:53 it's also the child's education and all those things.
03:56 So if you are going to allocate more to a certain goal--
04:01 in this case, the child's goal, which
04:05 is going to be, say, two or three or even four times
04:07 of what you would have normally contributed
04:10 if you had started early--
04:11 you will have to compromise on some of your own goals.
04:14 And the most common thing which happens at this stage
04:18 is that the retirement goal is the one
04:21 where the cut comes in.
04:22 Because that, for most people, is still
04:26 somewhere in the future.
04:27 So they say that instead of, say,
04:29 putting $20,000 away for retirement,
04:31 I will put in only $5,000 or $2,000
04:33 and allocate the remaining for the child's amount.
04:37 So that retirement goal then becomes difficult to achieve
04:42 because the implications are twofold.
04:44 One is a lesser amount is going into a long-term goal.
04:48 The second part is a goal like a return one
04:51 is also a very huge one in terms of both absolute numbers.
04:56 So achieving that larger number also
04:59 requires a larger and a consistent allocation
05:02 over a longer period of time.
05:03 So the implications can be quite severe.
05:07 The numbers will obviously show you
05:09 the difference which is there of starting late.
05:11 But the earlier you start, the earlier you've thought of this.
05:14 That is more important.
05:16 It will help you to start early.
05:18 The other aspect is how much is appropriate.
05:21 And I think that was laid out in the first illustration
05:26 that Kirtan pointed out, that if you
05:28 have to achieve a one-crore level 21 years from now
05:33 or 20 years from now at a compounded rate of 12%,
05:38 if you do 9,600 rupees per month starting now,
05:42 then that's something that you can achieve.
05:44 But Kirtan, deciding that you need one crore, that one crore
05:48 is a relatively arbitrary number.
05:50 How do you decide how much you need?
05:53 I think, Alex, that's a very pertinent question.
05:55 And that would, in my opinion, depend on two, three things.
05:59 The first is you will have to understand how much time do
06:02 you really have for that particular goal.
06:06 And for that reason, you will have
06:07 to have some clarity of what are you really planning for.
06:11 So to give you an example, let's take two cases.
06:14 Case number one, when you are trying
06:16 to plan for the child's education,
06:19 rather the graduation, which is abroad.
06:21 And case two, when you are trying
06:23 to plan for your probably accumulating
06:26 for your child's medical studies.
06:28 Now, both of these things are going
06:30 to be very differently planned.
06:32 Because there are two elements here.
06:34 First, when you're planning for graduation,
06:36 you probably are looking at a situation
06:38 where you need that money at the end of the 18th year.
06:41 But when you're planning for post-graduation,
06:42 probably you need this money at the end
06:44 of the 21st, 22nd year.
06:46 So that's the first differentiating factor.
06:48 And the second that comes in is what is the appropriate amount
06:52 and how do you decide that.
06:54 So let's say, for example, we are talking about the first
06:57 case here, where we are looking at trying to accumulate,
07:00 let's say, hypothetically, for my child's medical studies
07:06 here in India.
07:07 Now, if you're looking at doing medical studies here in India
07:11 and you assume that you are looking at the cost that
07:15 is today at 25 lakhs, which means
07:18 if I have to get my child to do medical education here
07:21 in India, today is 25 lakhs.
07:24 This cost is not going to be constant when you actually
07:27 are going to face the goal.
07:29 So the first thing that you have to add here
07:31 is try and understand that if 25 lakh rupees is the cost today,
07:35 how much will this cost really become
07:38 when the goal is due at 18 or 21 years of age.
07:43 So the first thing you will have to understand
07:45 is what is the current cost and that inflate it
07:49 by a minimum of 6% for you to be able to achieve
07:53 at the actual cost when the goal really arises.
07:57 Now, there are two things that you have to understand here.
07:59 6% is a very, very, very nominal rate
08:03 at which you are inflating this number
08:06 is because education inflation in India
08:09 is growing at a faster pace than the CPI inflation.
08:13 So do not do anything less than 6%,
08:15 but you will have to do at least 6% and higher.
08:18 Now, if you've understood that probably, let's say,
08:20 18 years later, the 25 lakhs that I'm
08:23 willing to spend today at 6% will become 71 lakhs,
08:28 then you know that the goal that you really want to achieve
08:31 is not 25 lakhs, but 71 lakhs because the cost
08:35 of the education, which is today 25 lakhs,
08:37 going to become 71 lakhs.
08:39 So now if you want to accumulate 71 lakhs,
08:43 then you understand that you will probably
08:45 have to do an SIP of 10,000 rupees
08:48 if you have 18 years to go and 12% at which you would
08:52 want to grow your assets or probably
08:55 it's a fair expectation at which your assets will grow.
08:57 But remember, if at all you're talking
09:00 about an international education,
09:02 you will have to probably use instead of 6%, a higher number,
09:06 let's say, 8%, 9% because you look at currency depreciation
09:09 also.
09:10 Yeah, and we'll come to maybe making investments
09:12 to protect you from that currency depreciation
09:16 because that's also a possibility to consider.
09:18 But it's a tricky situation, right, Arnab?
09:22 Because you plan for the worst, I guess,
09:24 if you can call it that.
09:26 And then if there's anything that emerges that is different--
09:30 and I'll talk about my own case.
09:31 My dad always hoped that I would do a particular course.
09:35 I didn't end up doing that course.
09:37 And so he essentially transferred the money
09:39 that he'd saved up to me and he said, you invest it
09:41 or you do what you want with it.
09:43 It could happen that you don't utilize the funds
09:45 that you save, but then you can always transfer it later.
09:48 The question I want to ask is, how do you attribute risk
09:52 to an individual that is, say, a few months old?
09:55 You don't know what their nature is going to be down the line.
09:58 But what you do know is that they've got a lot of time
10:01 on their hands.
10:02 So how do you attribute risk when you're investing
10:04 on behalf of somebody?
10:08 No, so what you say is absolutely correct.
10:10 It's not only tricky, it's very difficult also
10:14 because you don't know what is going to happen
10:17 over the next few years.
10:19 Forget, I mean, 15 or 16 years down the line.
10:22 There is one other aspect here which also comes into play,
10:25 which is that normally when it comes to, say, a child's
10:30 education, we think of postgraduate and higher
10:34 studies.
10:34 But at this point of time, if you look at it,
10:38 even school education has become so expensive
10:42 and that is also rising at such a rapid rate
10:45 that in between, it could be that you
10:48 might have to use some of the funds to fund even
10:54 the school education of the child.
10:56 So even that part of the entire child's education life
11:01 needs to be planned out because it should not
11:03 be that you are putting aside money for the longer term,
11:06 but you are in a situation where you have to use it earlier just
11:10 because you don't have additional funds.
11:12 So that is one aspect.
11:14 The other question which you asked
11:15 was with respect to what is the risk
11:18 that you attribute to the child in terms of their ability
11:22 to take risks.
11:23 Now, the way that one needs to look at this
11:26 is that, see, obviously, we don't
11:29 know how the child will behave or what their risk-taking
11:32 ability will be going forward.
11:34 But in this case, what you are doing
11:36 is you are investing on behalf of the child for a goal.
11:39 So you need to take into consideration what is required
11:43 to achieve the goal.
11:45 And since time is one of the factors which
11:48 can help you in this regard, you are in a position
11:52 to at least take a higher amount of risk.
11:55 But the main point here is that when
11:58 you look at goals for a child, and especially when it comes
12:02 to education, one point which is very important
12:06 is that you will need the funds on a certain date.
12:10 That is, if you are, say, going to pay
12:11 the fees of the child in year X, and then at that point of time,
12:16 you will need the funds.
12:17 You cannot say that I can postpone the goal by six months.
12:19 It's non-negotiable, yeah.
12:20 Yes, so which is why for these kind of goals,
12:23 it is always appropriate to have a balanced portfolio.
12:28 And in the initial years, you might have a higher allocation
12:31 to risk, be a little aggressive.
12:33 But at least in the last three to four years,
12:35 before that goal is to be achieved,
12:37 the balance within that portfolio
12:39 has to shift towards debt so that the money is available
12:43 when you actually want.
12:45 Ketan, you want to come in very quickly?
12:46 We have to slip into a very quick break.
12:48 But before that, you've actually laid out
12:50 this in an illustrative term.
12:52 You've broken it up in numbers as well.
12:54 You want to explain that?
12:57 Definitely.
12:57 I mean, so what happens here, Alex,
13:00 is because you've got 18 or 21 years,
13:03 because I'm talking about probably a graduation
13:06 and a post-graduation here.
13:08 What typically happens is if you choose fixed income,
13:12 and you say that you are only going to get 7%
13:15 to achieve probably--
13:17 or you say 10,000 rupees of SIP that you do at 7% at 21 years,
13:21 you will probably only accumulate 56 lakhs.
13:24 But if you do the same in equity at 12%, you will reach a crore.
13:28 So of course, risk will play a very big role
13:32 in what asset class do you choose to invest in,
13:34 and hence how much money you will really
13:36 be able to accumulate, Alex.
13:37 So we've discussed how much risk is appropriate.
13:41 We've discussed how much you need to save.
13:43 We've discussed how much you will probably need.
13:46 But we need to now get into the operative part of it, which
13:50 is where do you invest?
13:51 And if we're talking about mutual fund investments,
13:54 there are a few options in the solution category
13:58 or the solution-oriented mutual fund category,
14:01 which is specifically for children and their requirements.
14:05 Should you go to that route, or should you choose other options?
14:10 Alex, I think I like to split the investor community into two.
14:13 One is sophisticated investor, and another is retail who does
14:16 not have a lot of understanding.
14:18 I think a sophisticated investor can definitely
14:20 give the solution-oriented schemes a pass.
14:23 And I'll tell you why.
14:24 It's because if I have 18, 21 years
14:27 and I'm a sophisticated investor,
14:29 I don't want to be in hybrid schemes for 20, 21 years.
14:33 Also, if you look at the performance of these schemes,
14:36 they are not any superior to the FlexiCap category in the market.
14:40 The TER is also higher versus FlexiCap,
14:42 and hence I end up spending higher expense.
14:45 And the track record is also not very old,
14:47 because these have largely come into picture post-2018.
14:51 But of course, if I'm a retail investor,
14:54 the same thing works in my favor, right?
14:56 Because the scheme is hybrid, it has an asset allocation.
15:01 Because it has a five-year lock-in, it will bring in the discipline.
15:04 In fact, because it is linked to a goal, it can bring me higher discipline.
15:08 And while the performance may be bad or not that great versus a FlexiCap fund,
15:13 the performance in itself is not bad in that sense, right?
15:17 So I think if you are a sophisticated investor,
15:20 you might rather want to stick to equity or similar kind of funds.
15:25 But if you are a retail investor who does not have a lot of understanding,
15:28 I think hybrid or probably solution-oriented fund may work for you.
15:32 I do want to get Arnav's view on this one as well,
15:35 because the sticking points, in my opinion, Arnav,
15:39 are the total expense ratio, which in certain cases, I think,
15:43 crosses that 2% threshold.
15:45 And that means that your scheme needs to work that much harder
15:49 for you to earn a certain amount of money.
15:51 And the other aspect is that five-year lock-in,
15:54 which some might consider a little bit egregious.
15:57 What do you think about that?
16:00 No, so if you look at it, you have to consider the cost
16:03 that you are incurring in terms of the benefits that it's giving you.
16:07 Because for a person who is not able to track the mutual funds on a regular basis,
16:14 going in for creating a portfolio on their own
16:18 would also require them to make changes within that.
16:22 And that has two costs involved in it.
16:25 One is obviously that there will be a tax element which comes into play,
16:29 which doesn't come into play for these kinds of hybrid schemes,
16:32 because whatever the fund manager does,
16:34 it doesn't affect you till you actually sell the units.
16:37 The second thing for these kinds of changes is that
16:41 the extent to which you rebalance and how do you change it,
16:46 that also requires an element of sophistication,
16:48 which a normal investor or a retail investor
16:51 who's not very active in terms of following would find it difficult to do.
16:55 So the convenience element with a little higher cost
16:59 would be bearable if you have no option.
17:02 But if you are able to, say, be,
17:05 I mean, you need not be a retail investor who always goes for the hybrid
17:10 or the solution-oriented option,
17:12 because if you're a retail investor who's comfortable with mutual funds
17:15 and you create a four-five fund portfolio just for this kind of need,
17:21 that is, according to me, more than enough.
17:24 Only thing is that you should be able to follow it closely
17:27 or you should have an advisor who's able to do it and guide you properly
17:31 to make the required rebalancing whenever it's necessary.
17:35 Right.
17:36 Keep them coming back to you on which schemes to choose and what categories
17:40 and how many schemes,
17:41 because I think the other issue is that you might end up having too many.
17:45 I think, again, Alex, if we split these investors into two categories again,
17:53 somebody who's probably largely a retail
17:57 does not understand much about having the right kind of portfolio put together,
18:03 I think they'll be very good having,
18:06 let's say, a couple of multi-cap funds
18:08 and a flexi-cap fund as a combination to come together,
18:11 because it will then give them diversification across large, mid, small also.
18:17 And the flexi-cap category will leave it to the fund manager to decide
18:21 what market cap does the money really need to get allocated to at what time.
18:26 So I think as a retail investor,
18:27 you might as well end up doing a good job doing multi-caps and flexi-caps put together.
18:32 But again, if you are somebody who's comfortable with mutual funds,
18:36 you know how to do it,
18:37 you've done it, you've been doing it for some time,
18:40 building a 4-5 scheme portfolio spread across large, mid, small,
18:45 because it is 18-21 years of investment horizon,
18:48 because I've been talking about it since the start of the show,
18:50 will be a better way for you to look at it,
18:53 but provided you are somebody who understands and are comfortable with mutual funds.
18:56 Okay. Do you have a different opinion here, Arnav?
18:59 How do you construct your portfolio?
19:00 No, so portfolio construction would be on similar lines,
19:05 that, I mean, do not go too much,
19:08 do not spread it out too much because you also have other goals to look at.
19:12 So it should also be in tune with various other goals which you have,
19:16 and I would restrict it to 3-4 funds,
19:20 so that because, I mean, with this kind of portfolio,
19:22 you can cater to your requirements,
19:25 that is the sophisticated investor can cater to the requirements,
19:28 or retail investor who doesn't know all these things,
19:33 a couple of funds should be more than enough,
19:36 because that is where the fund manager is taking care of the team.
19:40 And over a period of time, as you move along and your goal comes near,
19:44 also keep looking at debt options to balance out the portfolio,
19:50 which is where, according to me, dynamic bond funds would be a better choice,
19:55 because here, once again, it's the portfolio manager who's moving between duration
20:00 and taking different kinds of risks, depending on the debt market situation.
20:05 Okay, and we've also put on screen the schemes that you've suggested.
20:08 You've also suggested the Sukanya Samriddhi scheme,
20:11 which is a scheme specifically for the girl child.
20:14 We've got Kirtan's recommendations as well,
20:18 and I asked him to talk about a model portfolio and what you can consider,
20:22 and he's spoken about Nippon Large Cap,
20:23 he's spoken about Kotak Equity Opportunities,
20:26 as well as Quant Mid Cap and SBI Small Cap as the options.
20:30 Kirtan, I've taken the liberty of putting that on the screen.
20:33 We've got a couple of queries from viewers that are related to children,
20:38 and I thought that it would be relevant for me to take that to you on this program.
20:42 The first one is Akshay, and he's a young parent.
20:45 He's 34 years old, and his goal is to save for his child's education.
20:50 And this echoes what we've been talking about.
20:52 He's looking at investing and saving for a period of 10 years,
20:56 and he would like to accumulate as much as 75 lakh rupees for his child's education.
21:01 He's already started investing, Kirtan,
21:04 and he's making SIPs of 5000 rupees in HDFC Balanced Advantage Fund,
21:12 5000 rupees in HDFC Multi Cap Fund,
21:15 10,000 rupees in SBI Blue Chip Fund,
21:18 and 10,000 rupees in Parag Parekh Conservative Hybrid Fund.
21:22 So essentially a combination of BAF as well as Conservative Hybrid
21:27 and a couple of equity schemes.
21:29 Is that the right approach?
21:30 Alex, I think first, if you're looking at accumulating 75 lakhs over the next 10 years,
21:38 then probably his SIP requirement is upwards of 33,000 a month.
21:41 So if he can increase his SIP, that'll be a great thing.
21:44 Second, because you have 10 years,
21:48 I am assuming that you probably might want to increase slightly higher
21:53 on the equity side of it.
21:56 And hence, if I have to choose what you're doing,
21:59 I would rather not do a Conservative Hybrid or a Balanced Advantage
22:04 and move that to probably a Mid Cap or a Large Cap Fund.
22:07 And when I'm one year or 18 months close to my goal,
22:11 I will start allocating or moving that money to fixed income.
22:14 I think that is how I'll be able to maximize because I have 10 years.
22:17 But this is only provided you have a slightly better risk appetite.
22:21 So you can continue with your HDFC Multi Cap, SBI, Blue Chip,
22:24 but you can move your Parag Parag or your HDFC Balance into a large and a Mid Fund.
22:30 Probably reach closer to your goal 12 months, 18 months before the goal,
22:35 start moving that into fixed income.
22:37 I think you'll do a better job.
22:38 Okay, fantastic.
22:39 There's one more question.
22:40 Prachi has got a surplus of 1 lakh rupees.
22:44 And I must point out that she is making investments on an ongoing basis,
22:48 but she's thinking of saving this for her son's education
22:53 as well as wealth creation down the line.
22:56 At this juncture, Arnab, are there any schemes that you would recommend
23:00 for something that would be needed perhaps in six years time or thereabouts?
23:05 So if one is that if the time period is just six years,
23:11 which is not much because it's not a very long time period,
23:15 I would prefer to go in with a hybrid portfolio because of two things.
23:21 One is that already you can see the world over at the moment,
23:25 equity markets are ruling with an element of froth to some extent.
23:32 So the risk, if you are investing just 1 lakh,
23:38 and if you are not going to add to it, then that is slightly higher.
23:43 So I would suggest that she look at a couple of equity-oriented funds,
23:49 one from the Flexicap category, which could be HDFC, Flexicap,
23:53 one from the large and mid-cap space,
23:58 which could be even the Canara, Robeco's emerging blue chip fund.
24:04 And then go on to a slightly hybrid fund also,
24:09 which will could be a balanced advantage fund.
24:14 Sure. All right.
24:15 All right. So I think that answers both of the questions that we had.
24:18 And thank you so much, Arnab, as well as Kirtan, for joining us on this program.
24:22 It's been insightful.
24:23 Viewers, I hope that this benefited you.
24:25 And if you'd like to tell us something,
24:27 or if you've got a question that you'd like to send us,
24:30 you can send it on that number on your screen right now.
24:33 There's lots more coming up over the course of the next few hours.
24:37 So do stay tuned. This is NDTV Profit.
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