My father recently retired and gave me Rs 20 lakh for my son's education, which is 10 years away. But he doesn't want me to invest it in equity. So, should I invest the money in debt funds for growth? If yes, then which funds are good for a 10-year horizon?
- Preeti Kadam
A 10-year time horizon is fairly long. So in an ideal world, one would like to have some allocation to equity. But having said that, my advice to her would be to look at it this way - your total fixed-income allocation would probably generate returns anywhere in the range of 6-8 per cent per annum. Now with that kind of growth, over a 10-year period, if she thinks that the accumulation would be sizable enough to provide for the higher education needs of her son, then there is absolutely no need for her to take higher risk by investing in equities. She can simply stick to three-four high-quality short-duration funds in the fixed-income space. These funds would serve the purpose.
But ideally, as I said that given her time horizon, at least some allocation to equity is called for. It could be anywhere between about a third of her portfolio to about 50 per cent, given her conservatism. For that, she can choose a couple of good multi-cap funds to add to her portfolio. However, since child education is an important and non-negotiable goal, any equity investment that she makes has to be spread out over at least 12 to 18 months. Likewise, while withdrawing from these investments to fulfil her goal, she must spread it out over a period of at least one-and-a-half to two years. Think of it this way, a goal like going for a vacation abroad or buying a house can still be postponed by one or two years if you hit a rough patch right at the time when you need the money. But a goal like your child's education cannot wait. So, that's why just to avoid catching a market at a bad phase right at the time when you need money, it is very important to plan your exit well in advance and exit the equity markets over a period of one-and-a-half to two years.