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Plan your child’s education DECEMBER 2013

Hdfc mf outlook money plan your childs education

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Plan your child’s education

december 2013

contentsGet a fix on your target ..........3

Be an early bird .....................5

Investing approach ................9

Building MF portfolio ........... 17

Reviewing the portfolio ....... 22

The last mile ....................... 24

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND

Plan your child’seducation

1

Copyright © Outlook Publishing (India) Private Limited, New Delhi.All Rights Reserved.

No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or means electronic, mechanical, photocopying, recording or otherwise, without prior permission of

Outlook Publishing (India) Private Limited.Printed and published by Indranil Roy on behalf on Outlook Publishing (India) Pvt. Ltd. Editor: Udayan

Ray. Published from Outlook Money, AB 5, 3rd floor, Safdarjung Enclave, New Delhi- 29.

This booklet has been developed by Outlook Money for the readers of Outlook.

The information provided herein is solely for creating awareness and educating investors/potential investors about rules of investment and for their general understanding. Readers are advised not to act purely on the basis of information provided herein but also to seek professional advice from

experts before taking any investment decisions. Outlook Money does not accept responsibility for any investment decision taken by readers on the basis of information provided herein. The objective is to

keep readers better informed and help them decide for themselves.

DECEMBER 2013Project Coordinator: Sunil Dhawan

Copy Desk: Sutirtha SanyalDesign: Anil Panwar

Graphics: Varun VashishthaPhotos: Bhupinder Singh

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 32

With career options becoming fiercely competitive, education from premier institutions has become the key to a rewarding career. The best of education however, comes at a price. Every parent wants the best for his or her child’s future and many parents end up digging into their retirement kitty or take a loan to meet the education expenses of their children. However, a proactive approach

Get a fix on your tarGetThe first step of planning for your child’s investment is to get a fix on your target amount and then work backwards to ascertain how much money you need to put aside every month. Since the funds would be

to fund a child’s education will help one fulfil his dream of seeing his child become a successful engineer, doctor, or an MBA graduate. Read on how mutual funds (MFs) can help you give your child the best of education that you want to give him.

Education From prEmiEr instituti-ons has bEcomE thE kEy to a rEwarding carEEr. thE bEst oF Education, howEvEr, comEs at a pricE

Plan your child’seducation

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 54

required in the coming years, it is essential to factor in inflation. Otherwise, it would be a major hurdle in meeting your financial goals. For instance, at an inflation of 7 per cent per year, an engineering course that costs `8 lakh now will cost around `30 lakh after 20 years. Assuming equity investments would grow at 12 per cent compounded annualised, you need to put aside around

`3,000 per month to reach that goal. Similarly, a two-year, full-time MBA course at the Indian Institute of Management that costs around `10 lakh now would cost around `38 lakh after 20 years. Therefore, at

an assumed growth rate of 12 per cent, you will need to put aside `4,000 per month to reach that amount. With soaring education costs and high inflation, one could consider going in for equity-oriented funds, as equity is the only asset class that beats inflation in the long term. Risk and reward always go hand-in-hand. If one does not take the required risks, chances of getting a reward reduces drastically.

the sooner you start, the better it isThe ideal time to start planning is when your child is born. School fees may not be a big burden, but it

bE an Early bird

Plan your child’seducation

secure child’s future

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 76

is for your child’s college and higher studies that you would probably need to save in advance. Moreover, the sooner you start, the better it is. This will have a big impact on the overall corpus you create for your child’s education. Many parents make investments for their children out of sheer emotion. However, there has to be some planning that will help you give your child not only a better life, but also the freedom to choose his or her career and build it in a better way.

how much will you nEEd to accumulatE to Fund your child’s proFEssional FEEs in FuturE

The funds that would be required in the coming years will be much higher than the current value.

Courses engineering MediCal MBa

Current fees* `8,00,000 `15,00,000 `10,00,000

expeCted Fees aFter5 years 1,122,041 2,103,827 1,402,551

7 years 1,284,625 2,408,672 1,605,781

10 years 1,573,721 2,950,727 1,967,151

12 years 1,801,753 3,378,287 2,252,191

15 years 2,207,225 4,138,547 2,759,031

20 years 3,095,747 5,804,526 3,869,684

* The average fees at reputed colleges in that particular stream

Education costs inflated at 7 per cent per annum

3,869,684

Get a fix on your future tarGet amount

Plan your child’seducation

small stePs for a biG dreamsmall invEstmEnt amounts can do wondErs in thE long-tErm

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 98

The above table shows how an investment of `5,000 per month would grow in two different growth rate scenarios that fetch 12 per cent and 8 per cent returns, respectively.The above illustration is based on assumed rates of return only to explain the concept of Power of Compounding. It does not depict, forecast or guarantee the returns given by any instrument or asset class.

Tenure 12 per cent 8 per cent

5 years `4,01,706 `3,64,723

7 years `6,37,953 `5,54,725

10 years `11,09,650 `9,00,621

12 years `15,25,998 `11,79,797

15 years `23,57,289 `16,88,031

20 years `45,56,055 `28,44,995

5 years

7 years

10 years

12 years

15 years

20 years

10,00,000

20,00,000

30,00,000

40,00,000

`

50,00,000

0

invEsting approach

the mutual funds routePlanning a child’s future by way of mutual funds (MFs) is ideal for those who do not have much time or expertise to actively build a portfolio for this specific need. MFs offer disciplined approach to achieve financial goals with ease. Mutual funds are professionally managed and offer diversification, which an investor does not get when he or she invests in individual stocks or any other

financial instrument. Most individual investors do not have the skills and time to monitor every single investment in the manner a professional fund manager does it

Plan your child’seducation

POWER OF COMPOUNDING

siP advantaGe

every day. Fund managers are highly trained and stick to disciplined ways of investing. That is the reason investing through MFs is a good form of investing. In addition, the corpus you are building is for your child’s future. So, you would prefer to hand it over to a professional, who with his years of research, experience and expertise, would help you meet your financial goals.

There are several ways to create wealth through MFs. You may keep investing a lump sum amount in the chosen fund as and when available. Alternatively, you may take the systematic investment plan (SIP) route. SIPs involve investing a fixed amount of money at regular intervals rather than investing a larger lump sum amount. Decide how much you want to invest on a regular basis. It is important to choose an amount that you will be comfortable investing regularly over the long term. This will ensure that you do not feel the burden of investing at all, as you invest smaller portions regularly

rather than a large chunk. An SIP averages out the cost over the long term, thereby reducing the risk in the long term. It works on the principle of rupee cost averaging. The essence of SIPs is that when the stockmarket falls, investors automatically acquire more units. Likewise, they acquire fewer units when the stockmarket rises. This means that you buy less

when the prices are high and more when the prices are low. Hence, the average cost per unit falls over a period of time. For salaried employees, it makes sense to keep investing a fixed sum of money each month towards funds, ideally through direct debit (automatic debit of savings account).

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 1110

Plan your child’seducation

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 1312

Which of these are examples of investment products?a) Shares and mutual funds

b) Bonds and goldc) Bank depositsd) All of the above

Your father deposits `10,000 in bank and gets `20,000 after 3 years. From

where does bank arrange this extra amount?a) Bank lends to other people and earns interest from themb) Bank incurs a lossc) Bank uses other investors’ money to give it to your fatherd) Banks borrow from other banks to give it to your father

Amit, a class IX student receives cash gifts from relatives. What according to

you should he ideally do?a) Give it to his parentsb) Buy gadgets c) Save it in a bankd) Make a budget to develop good buying and spending habits

Rahul wants a tablet. What should he ideally do?a) Break his piggybank and buy

b) Ask parents to fund itc) Set time limit and keep saving pocket money to reach the goald) Borrow from friends

Which is better—taking `100 every month or `1,200 after 12 months?

a) Take `100 every month as what rupee can buy declines with timeb) Take after 12 months as you will get more

Your father has told you that you would not get your pocket money for a few

months. What would you do?a) Swipe the credit card which your father gave you for emergenciesb) Reduce your expenses and use your savingsc) Borrow from a friend

Sooner you start saving, faster your money grows because of the effect of

a) Compounding, where interest amount earned also earns interestb) Falling purchasing power of money over a period of time

Kid’s uiz uiz uiz uiz uiz

Amit, a class IX student receives cash gifts from

Shares and mutual funds

1

a)2

after 12 months? 3

pocket money for a few 4

because of the effect of5 Which of these are examples

6

`7

Plan your child’seducation

Here is the answer sheet:1. d 2.c 3.a 4.b 5.a 6.d 7.a

Here is the rePOrt CarD:If you have scored less than 4: You

are a Money Novice. You need to spend quality time with parents to

learn about money.If your score is 5-6: You are a

Money Learner. You need to learn the money ropes some more.

If your score is 7: You are a Money Champ. You are off to a great start.

No matter you haven’t started earning yet, attempt this quiz to see how well you are equipped in handling money matters!

If you have irregular income, systematic transfer plan (STP) will help you beat stockmarket volatility. For those who have a lump sum to invest, but would like to go the SIP way, STP comes into play. Through an STP, you can transfer parts of a lump sum from one MF scheme to another (within the same fund house) at regular intervals. Such a transfer averages out the cost of purchase and mitigates market-related risks. The investor can first park his funds in a liquid fund and then

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 1514

transfer it to a scheme (usually equity or balanced) of his choice at regular intervals. STP works well for investors who have a large sum of money and intend to invest it in equity markets, but do not have the skill or information to judge stockmarket movements and time their entry into the stockmarket.

stP routes choose the riGht instrumentSimply saving for your child’s future by putting money in your savings bank account is not going to help. One needs to consider investing in the right instrument in order to make sure that the fund is available when required. For planning your children’s future, while the investment options are galore, selecting them is a Herculean task. For example, if the investment is planned well in advance, one can start investment with products that are entirely or partially equity-based. When you have time on your side, say, 10 years or

Plan your child’seducation

so, you should invest in equity funds, preferably the large-cap ones. However, if you are not willing to take higher risk, you may stick to balanced funds as they offer opportunities to gain from both debt and equity markets with moderate risks. Here, debt gives cushion to your investment, while equity provides growth. Other options you can explore are child-oriented funds, which are balanced funds, too. However, explore funds with a larger portion of the portfolio exposed to equity, since they can help you build a substantial corpus to meet your financial goals, beating inflation in the form of rising cost of living. Equity has a nature to reward long term investors, thus, start early and stay invested for long.

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 1716

building mF portFolio

for lonG-term fundinGWhile drawing up an MF portfolio, keep certain basic rules in mind, especially, when you are building a portfolio for your children. Know the broad categories of MF schemes in the industry, their purpose and, how they work. This means, for instance, knowing the difference between equity, balanced, and debt funds—where they invest, what

Plan your child’seducation

influences their performance and, what kind of returns they are likely to generate. This will help you zero in on appropriate matches for your risk profile and investment objective. Respect your risk-taking capacity. Do not go overboard on equities if you are not comfortable taking risks. Keep your child’s requirement, say, his studies

and, the investment horizon in mind while drawing up your portfolio. For instance, if such goals are in the distant future and you are willing to court risk, the money earmarked for them should be invested in equity funds. Over long periods, equities have the potential to outperform all other asset classes.

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 1918

for short-term fundinGIf you have grown-up children and they are likely to go to college soon, you will need a lump sum corpus at the time of their admission. For such a situation, it is better to park that money in debt-oriented MFs. For instance, if your child is in Class X and will go for an engineering

Plan your child’seducation

match the financial Goal to the career Goal

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 2120

course, you will have only two years in hand. In such a scenario, you should choose debt-oriented funds and fixed maturity plans (FMPs). FMPs are closed-end debt funds with a fixed tenure. Choose an FMP maturing at least a month before the time you need the money. The reason is that all these instruments give better post-tax return as well as liquidity.

Once the child is born, parents should start saving for the child’s higher education, as a lump sum amount would be required in the future. Over the next few years, as the child proceeds towards a stage where he or she has to make clear-cut choice of his or her education stream, it is important to understand the career goal that the child is looking at. Simultaneously,

parents need to keep track of what the requisite funds would be. Children may or may not be sure of their career goals yet, but a parent can conduct a research to get a fair idea of how much funds would be required for the different career options under a particular stream the child may choose.

Plan your child’seducation

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND 2322

If you think that your job is done once you have put your money in MFs, then think again. Your portfolio may contain star performers, but just a couple of oversights could affect its performance.Therefore, you need to stop along the way occasionally to make sure that things are happening as planned. Following a few rules will help you avoid the most common mistakes one makes in building and maintaining an MF portfolio. Track your scheme’s net asset value (NAV) on a regular basis, but not too frequently. Look for changes in the portfolio. Compare the scheme’s performance with that of its benchmark, or other similar schemes. If following up on your portfolio regularly is not possible, make sure that you track your fund at least every 18-24 months.

reviewinG the Portfolio

Plan your child’seducation

AN INVESTOR EDUCATION AND AWARENESS INITIATIVE FROM HDFC MUTUAL FUND24

The closer you get to your destination, the more careful you need to be, lest you take a wrong turn. The process of raising money from investments for higher education should start much before you need the money. Start moving from riskier instruments to safe ones at least 2-3 years before you would need the funds. Once closer to your goal, transfer the corpus to safer instruments, such as debt funds, in order to lock in the returns. The shifting to debt funds would ensure de-risking the education fund, as taking a prolonged unnecessary risk is the last thing you would want to do as a parent.

thE last milE

safety and liquidity is more imPortant near final destination As part of its Investor Education and Awareness Initiative,

HDFC Mutual Fund has sponsored this booklet. The contents

of this booklet, views, opinions and recommendations are of the

publication and do not necessarily state or reflect views of HDFC

Mutual Fund. HDFC Mutual Fund does not accept any liability

arising out of the use of this information.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME

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Plan your child’seducation