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Derisking Kids' Funds

We may religiously save towards a goal, but, in reality, it may not help us realise that goal. A single bad year could wipe out a large chunk of our accumulated corpus. Losing it close to one’s goal is very unfortunate. Managing risks the right way actually determines how much one ends up saving towards any goal.

As such, you need to take a dynamic approach as well as to shuffle between asset classes to create wealth.

As a parent, you have been saving towards your child’s needs, but now the time is nearing when you will actually need those funds. As an asset class, equities needed time to mature and, over time, you would have saved through equity shares, equity mutual funds (MFs) and unit-linked insurance plans (Ulips). But, with your goal nearing, it’s time to switch to less volatile debt assets to preserve capital. Some of these debt products could be debt mutual funds, bank fixed deposits and even liquid funds.

Ideally, you should start the derisking process about three years away from your goal, be they your child’s education or wedding. Also, do not move out of equities into the debt assets in one go, but in instalments.

DERISKING MUTUAL FUNDS

Moving funds out of equity MFs is best done through a systematic transfer plan (STP) into a debt MF scheme, preferably of the same fund house. Through an STP, you can shift funds out of equities and into debt on a regular basis, thereby creating a corpus that is less exposed to volatility. This will give you a staggered approach to the shifting process. An easy way is to divide the fund balance into 36 instalments and then execute the STP process. For instance, for a balance of `10 lakh in an equity MF portfolio earmarked for a child’s needs, approximately `27,000 will get transferred each month into debt or liquid fund over three years.

FOLLOW-THROUGH

It is also important to ensure that your further investments ideally stop at least five years before your intended goal. It is not advisable to keep your investments in equity MF through the systematic investment plans (SIPs) running when the goal is less than five years away. Equity investments need time to grow. So, if you need funds when your child turns 18, run the SIPs in equity MF’s for 15 years and in debt MF’s for te last three years.

DERISKING OTHERS

Premiums towards children’s Ulips should be put into equity or growth fund options till three away from the goal. Few such Ulips have it as an inbuilt feature in which a certain percentage of the funds automatically gets shifted to debt funds. Around this time, redirect any future premium and also start shifting from the growth fund into debt funds. The idea is to preserve capital and take the least exposure to volatility. The same goes for investments in shares, index funds or exchange-traded funds (ETFs) earmarked for your child’s needs. Try to exit from small or mid-cap stocks before selling off the large-cap funds bought for your child needs. Also, divert all proceeds towards debt or bank deposits. Keep the Public Provident Fund (PPF) account in your child’s name running through regular funding. Do not withdraw or take a loan from it unless you fall short of funds. You can ask your children to continue investing in the PPF account in their name once they start earning.

BRIDGING GAP

There could be instances where you actually face a shortage of funds. Then, opt for an education loan to fund the shortfall. Typically, education loans need to be repaid within 5-7 years after the child starts earning. Try not to liquidate investments earmarked for your retirement or other goals.

Next To Come: Preparing to buy a car