Securing Your Child’s Future: Well Begun is Half done

This is a real case study of one of my clients when we first met in 2013. I received his call last week and he was quite happy of achieving his gaols. So, thought of penning down my ideas. The names here have been changed to protect ones identity.

Ravi: Mohan, I’m really worried about how I’ll manage to fund my 2-year-old son’s education. With so many financial products in the market, I feel lost. Can you guide me?

Mohan: Of course, Ravi. It’s natural to feel overwhelmed with so many options out there. Let’s simplify this. First, let’s estimate the future cost of your child’s education based on some basic calculations. What kind of career do you envision for him?

Ravi: Well, I’d like to keep options open, but let’s assume he wants to pursue MBBS.

Mohan: Good choice. The current cost for an MBBS program, including the internship, is around ₹30 lakhs for 4.5 years. If he plans to do an MD afterward, that might cost around ₹45 lakhs in today’s terms. These numbers are ballpark figures, of course, but we can use them to plan better.

Ravi: ₹30 lakhs for MBBS and ₹45 lakhs for MD? That’s ₹75 lakhs already. How much will it cost by the time he’s ready?

Mohan: Considering an 8% annual inflation rate, the costs will be much higher in the future. By 2034, when he might pursue his MD, we estimate the total cost of MBBS to rise to about ₹1.027 crores and MD to around ₹2.26 crores.

Ravi: Wow! That’s ₹3.28 crores! How will I save that kind of money?

Mohan: Don’t worry; with the right plan, it’s achievable. To meet these goals, you’ll need to invest systematically. To fund the MBBS cost of ₹1.027 crores by 2029, you’ll need to invest around ₹19,767 per month. For MD, you’d need to invest ₹23,151 per month to accumulate ₹2.26 crores by 2034. Together, this would require a monthly SIP of ₹42,918.

Ravi: That’s quite a big commitment. What if I start and lose motivation along the way?

Mohan: That’s where discipline and the power of compounding come in. Let me share an example of another client I worked with in 2013. He had similar concerns, and I suggested a mix of four funds for his goals.

Ravi: What happened with him?

Mohan: He started investing the following amounts:

₹6,500 in a Small Cap Fund
₹11,000 in a Tax Saver Fund
₹13,000 in a Large & Mid Cap Fund
₹12,500 in a Flexicap Fund

Together, his monthly investment was ₹42,918, just like yours would be.

Ravi: And how did it go?

Mohan: Amazingly well. Today, those investments have grown significantly:

Small Cap Fund: ₹39.95 lakhs
Tax Saver Fund: ₹44.79 lakhs
Large & Mid Cap Fund: ₹65.98 lakhs
Flexicap Fund: ₹55.88 lakhs

In total, he has already accumulated ₹2.06 crores, and he still has 5 years left to meet the MBBS goal and 10 years for MD. He’s comfortably on track to achieve both.

Ravi: That’s incredible. So the key is to stay invested long-term and stick to the plan?

Mohan: Exactly, Ravi. The simpler and more consistent your investments, the better your chances of success. Make your investments as “boring” as possible—no constant tinkering or chasing trends. Let time and discipline do their magic.

Ravi: This sounds reassuring. Let’s create a plan for my son’s education.

Mohan: Great decision! Let’s get started and ensure your son’s dreams are well-supported financially.

Are you in your 40s and still with no Savings? Here is a plan for you

Ramesh: You know, Sweta, most of the investors I meet in their 40s or older start getting really serious about their investments. But people in their early 30s don’t seem as concerned about retirement. They think they have plenty of time to deal with it later.

Sweta: Yeah, I’ve noticed that too. When you’re in your 30s, retirement feels so far away. It’s easy to think you’ve got years before you need to start worrying about it.

Ramesh: Exactly! But that’s one of the biggest mistakes people make. They underestimate the power of compounding. Just imagine if they realized that investing as little as ₹117 per day at age 30 could make them a Crorepati by the time they retire at 60.

Sweta: Wait, seriously? Just ₹117 a day? That doesn’t sound like much at all!

Ramesh: It really isn’t. But the numbers get staggering if you wait. If you start at 40, you’d need to invest ₹381 per day, and if you wait until 50, that jumps to ₹1,522 per day to reach that same ₹1 crore goal.

Sweta: Wow, that’s a huge difference! It really shows how much time plays a critical role in growing your money.

Ramesh: Exactly. The earlier you start, the easier it is. But when people come to me in their early 40s with no savings, it becomes a much more serious conversation. There’s still hope, but the approach has to be more aggressive.

Sweta: What would you recommend for someone in their 40s with no savings?

Ramesh: If they want to retire comfortably in the next 20 years, they need to take some drastic steps. First, they should start investing half their salary in equity mutual funds immediately. No delays.

Sweta: Half their salary? That’s a big commitment.

Ramesh: It is, but it’s necessary at that stage. Let’s take a family of three, with monthly expenses of ₹50,000 and a post-tax salary of ₹1,00,000. If we assume inflation at 6% for the next 20 years and mutual fund returns at 11% annually, they could accumulate around ₹4.67 crores by the time they’re 60.

Sweta: So, this plan could still work for someone starting in their 40s?

Ramesh: Yes, but it’s not easy. It requires a lot of discipline.

Sweta: For those in their 30s, though, the power of compounding can work wonders. They’d only need to invest around 25-28% of their income each month, compared to someone starting at 40, who’d need to invest 50% of their salary.

Ramesh: Exactly, it all comes down to how much of your income you can set aside and how disciplined you are in maintaining that.

Sweta: So, essentially, the earlier you start, the less painful it is, and the more flexibility you have.

Ramesh: Precisely. Time is your greatest asset when it comes to investing. If more people in their 30s understood that, they’d have a much smoother path to retirement.

The SIP Dilemma: Timing the Market vs. Time in the Market

One bright morning, Rohit and Mohan, two old friends, met for their usual coffee catch-up. Both had been hearing about the benefits of SIPs (Systematic Investment Plans) and decided to dive deeper into how SIPs work. Rohit was eager to understand when the “best time” to start an SIP was, while Mohan was more interested in the long-term impact of starting at different points in the market cycle.

Rohit: “Mohan, I’ve been thinking. What if we could predict the exact top or bottom of the stock market? Wouldn’t it be better to start my SIP at the bottom when prices are low?”

Mohan: “Hmm, sounds tempting, but there’s more to it than meets the eye. Let’s assume for a moment that you do have magical powers and can start your SIP at the perfect bottom. I, on the other hand, will start at the top when the market is at its highest. Want to see who ends up with more wealth in the long term?”

Rohit (laughing): “Alright, let’s do it! But it’s pretty obvious that you’d be worse off starting at the top, right?”

Mohan pulled out a notepad and began explaining.

Mohan: “Let’s take an example. Imagine back in January 2008, you started a monthly SIP of ₹10,000 in the BSE Sensex TRI. The market was at its peak then, just before the big crash.”

Rohit: “Ouch, sounds risky.”

Mohan: “True, but bear with me. By July 2024, you would have invested ₹19.9 lakh in total. And guess what? Despite starting at the top, the value of your investment would now be ₹74.7 lakh with an annual return of around 14.4%.”

Rohit (raising an eyebrow): “That’s quite impressive. But what if I had started at the bottom?”

Mohan: “Great question! Now let’s say you began in March 2009, right after the market crashed (The Great Recession). You’d have invested ₹18.5 lakh in total, slightly less than me. However, your investment would now be worth ₹63.8 lakh, with a return of 14.7%.”

Rohit (surprised): “Wait a second! I’d make less, even though I started at the bottom of the market?”

Mohan: “Exactly! While your percentage return is slightly higher, I’ve invested more because I started earlier, so my overall wealth is greater. This is what we call the Cost of Delay. The longer you wait to start, the bigger the gap becomes. Missing out on those early months or years can cost you a lot in the long run.”

Rohit: “But why is there such a big difference?”

Mohan: “It’s simple: compounding. Time is the most powerful tool when it comes to investing. The longer your money stays invested, the more it grows. Even though the market was at its peak when I started, my money had more time to compound. Over time, the highs and lows even out, and the timing becomes less important.”

Rohit: “So, in the long run, it doesn’t really matter if I start at the top or bottom of a market cycle?”

Mohan: “Exactly! Over many years, the difference in returns between starting at the top or bottom becomes almost negligible. The real risk isn’t the market; it’s not starting early enough. The biggest mistake is missing out on the power of compounding.”

Moral of the Story:

Mohan summed it up, “Rohit, it’s not about timing the market, but time in the market. The earlier you start, the more wealth you can create. Waiting for the ‘perfect’ moment can cost you far more than starting at a peak ever will.”

Rohit nodded thoughtfully, realizing that the best day to start his SIP was not tomorrow, but today. So do not waste your time and keep things simple.

You are Unique so are your financial needs.

Simple stories create brilliant ideas. That’s the premise with which today’s blog post has been drafted to state that there is nothing called the best plan / product in the financial market.

Once upon a time in the bustling city of Mumbai, there lived two friends, Arjun and Radhika (names changed intentionally). Both were ambitious and had just started their careers. Every month, they set aside a portion of their earnings with dreams of a bright financial future.

One day, while discussing their savings, Arjun excitedly asked, “Radhika, which mutual fund should I invest in? I want to pick the best one!”

Radhika, being the thoughtful one, paused for a moment. “Arjun, I think you’re asking the wrong question.”

Arjun looked puzzled. “What do you mean?”

“Instead of asking which fund, shouldn’t we first ask what type of fund suits us?” Radhika replied. “You see, it’s not about picking the ‘best’ fund out there. It’s about picking the best fund for you.”

Arjun frowned, trying to make sense of Radhika’s words. “But why does it matter? Aren’t all funds just about making money?”

Radhika smiled and began to explain. “Imagine this: You and I both want to climb a mountain. But you’re young, energetic, and want to reach the peak quickly, while I’m more cautious and prefer a steady pace. You might choose a steeper, more challenging path, while I’d choose a more gradual one. Both paths can lead to the top, but the choice depends on who we are, our abilities, and how we want to climb.”

Arjun nodded slowly. “So, you’re saying that choosing a fund should be based on my own goals and situation?”

“Exactly!” Radhika exclaimed. “For instance, you might be okay with more risk because you have time to recover from any setbacks. You could go for mid- or small-cap funds, which are like those steep paths—full of potential but also full of risks. But someone who’s closer to retirement might not want that kind of uncertainty. They might need something more stable.”

Arjun was beginning to see the picture. “But what about all the talk I hear? People say small-cap funds are the way to go if you want big returns!”

“Well, that’s partly true,” Radhika acknowledged. “But remember, what’s popular now won’t always stay on top. Markets are like the weather—sunny one day, stormy the next. Small-cap funds might be great when the sun’s shining, but when the storm hits, they can be the first to get drenched.”

Arjun chuckled at the analogy. “So, it’s not just about chasing the hottest trend?”

“Exactly,” Radhika said. “It’s about building a portfolio that suits your journey. You don’t want to be caught unprepared when the weather changes. Instead of just chasing returns, think about your own risk tolerance, your goals, and how long you plan to stay invested.”

As they continued their conversation, Arjun realized something important. The real key to successful investing wasn’t just in picking the “best” fund, but in understanding who he was as an investor. The right fund for him was the one that matched his personal journey, not just the one everyone else was talking about.

In the end, Arjun decided to approach his investments thoughtfully, focusing on what mattered most—his own financial goals, risk tolerance, and investment horizon. And with that, Arjun and Radhika continued on their respective paths, confident that they were making the right choices for their futures.

And so, they lived financially ever after, with portfolios that suited their unique journeys.