Goal Based Investing – A Smarter Way to Plan for Your Child’s Future

As parents, we all want the best for our children – the finest education, a shot at studying abroad, a beautiful wedding, or simply a life with few financial worries. But fulfilling these dreams require more than just love and dedication. You need a clear, well-structured plan. Today we discuss how goal based investing helps you plan smartly and more efficiently for your child’s future.

The Traditional Way of Securing your Child’s Future

Most Indian Parents at some point, have opened a fixed deposit or have taken out an insurance policy in the name of their child. While the intentions behind these actions can never be doubted, they often lack one important thing – a clear goal.

For example, you are investing ₹10,000 per month in a savings plan. But do you know if this amount is enough? Is the amount too much? Or is the amount too less? What if your child wants to pursue engineering from an IIT or do an MBA from a reputed university abroad? Will this investment be sufficient to cover the rising costs of wedding 10 – 15 years down the line?

So instead of investing a figurative amount, what if there was a better way? There is; Goal Based Investing. Let us deep dive into the concept and look at the strategy step-by-step.

First Steps: Defining your Goal

Goal Based Investing begins by asking a simple question first; “What is the goal, and how much will it cost in the future?” So, begin by listing all the big milestones for your child. Also list down how many years the goal is away from today. For example, School and Higher Education – 10 Years, Post Graduation Abroad – 14 Years, Marriage – 17 Years, Seed Capital for Business – 16 Years, etc.

Once you have a list of all the goals that you want to plan for your child, begin to estimate the current costs for achieving these goals. For example, an MBA abroad may cost ₹40 Lakhs today. Now, one thing to note here is that the cost may not remain the same in the future, so you would also need to estimate the future cost of these goals. You can use Future Value Calculators that are available online for free to estimate what the amount of goal will be in the future.

Second Step: Working Backwards to understand – How much to Invest?

Once you know the future value of the goal and number of years left for that goal, the next step is to understand how much you would need to invest each month to reach the targeted goal amount. You can use EduFund’s Target Amount SIP Calculator available on the website to find out the amount. Let’s go back to our MBA example. The target value is ₹1.52 Crore and assuming a 12% return, you need to invest around ₹34,800 per month.

You would realise now that instead of investing an amount randomly, you would now exactly know how much amount you need to invest for each goal and for how long.

Bonus: – If the amount of the SIP, seems too high now, you can opt for Top-Up SIP. You can use EduFund’s Step Up SIP Calculator to understand how much amount you need to invest to reach the same amount. In our example, the amount of Top-Up SIP needed comes down to ₹17,500.

Third Step: Choosing the Right Investment Vehicle

After understanding the target amount, the required amount to reach the target, the next step is to choose the right investment vehicle to park your investments. While there are various options available for investments like, Fixed Deposits, Recurring Deposits, Child Savings Plan, etc; Mutual Funds are one of the best tools for goal-based investing, especially for long term goals of your child. Here’s why:

– Mutual Funds allow you the option to diversify your investments across asset classes like Equity, Debt, Gold, other Commodities.

– Mutual Funds offer you the most efficient way to invest regularly through SIPs and Top-Up SIPs.

– With Mutual Funds, you need not worry about choosing the best investments as professional fund managers do this work for you.

– Mutual Funds also allow you the flexibility of investing low amount, choosing your own investment style – Lump Sum, SIP, Top Up SIP, STP, SWP, and benefit of investing in various assets through single schemes via Multi Asset Funds.

– Depending on your Investment Horizon, and your Risk Profile, you can choose the right mutual fund from multiple categories available for investment.

Final Step: Tracking and Re-Aligning

It is important to note that you cannot just calculate all the required amounts – from target value of goal to required amount for achieving the goal and do all the executions and forget about it. Life changes, expectations may change, your income will go up, and your expenses might too. It is also possible that your child may plan to pursue MTech instead of MBA.

That is why it is important to review your goals and investments regularly (once every year) and adjust wherever needed. This ensures you remain on track to achieve your goals; bringing you closer every year.

Illustration

We have prepared a table to show an illustration of how you can prepare a list of your child’s goal along with the investment required to achieve the same. We are taking the earlier example for the same.

Source:- EduFund Internal Research, EduFund Calculators

Inflation rate considered for Education-10%, Marriage-8%, Seed Capital-6%. Returns Expected: 12%. Top Up %:- 10%

Final Thoughts

Raising a child is the happiest thing to do. But in today’s world it is also a big responsibility – and the financial aspect of this responsibility cannot be ignored. Goal Based Investing approach allows you to be aligned with your child’s needs. It is a clear, logical approach as compared to relying on guesswork-based investment approach.

It is okay to start small but starting with a clear goal will provide you the needed confidence and a clear understanding of when to increase your investments to achieve your goal. Because as parents, we want the future of our children built not just on dreams but a solid financial foundation.

Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security.The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment.The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.

About the author

Niraj Satnalika

Head Of Research,EduFund

Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.