Investment portfolio plan for child
Parameters for creating portfolio:
Risk tolerance: This refers to how much risk you are willing to take with
your investments. Generally, the higher the risk, the higher the potential
returns, but also the higher the volatility and uncertainty. Since you are
investing for a long-term goal, you may have a higher risk tolerance than
someone who needs the money sooner. However, you should also consider
your emotional comfort with market fluctuations and your ability to
withstand losses in case of adverse events.
Time horizon: This refers to how long you plan to invest before you need
the money. The longer your time horizon, the more you can benefit from
compounding returns and the more you can afford to invest in riskier assets
that may offer higher returns over time. However, you should also be aware
of the impact of inflation on your future purchasing power and adjust your
portfolio accordingly.
Expected returns: This refers to how much you expect to earn from your
investments over time. Expected returns depend on various factors, such as
the type of asset, the market conditions, the economic environment, and the
historical performance. You should have realistic expectations based on
your research and analysis and not rely on past results or future projections.
You should also consider the trade-off between risk and return and choose
investments that match your risk tolerance and time horizon.
Inflation: This refers to the general increase in the prices of goods and
services over time. Inflation reduces the value of money and erodes your
future purchasing power. To protect your portfolio from inflation, you
should invest in assets that can grow faster than inflation or provide a hedge
against it. For example, equities, real estate, commodities, and inflation-
linked bonds are some of the assets that can help you beat inflation over
time.
Taxation: This refers to the impact of taxes on your investment returns.
Different types of investments have different tax implications depending on
your income level, tax bracket, holding period, and tax laws. You should
consider the after-tax returns of your investments and choose tax-efficient
options that can help you maximize your net returns.
Diversification: This refers to the practice of spreading your investments
across different types of assets, sectors, markets, and regions.
Diversification helps you reduce your overall risk by lowering the
correlation among your investments and minimizing the impact of any
single asset or event on your portfolio. You should diversify your portfolio
according to your risk tolerance, time horizon, expected returns, and
investment objectives.
Based on these parameters, a possible investment portfolio for a child could look
something like this:
Allocatio
Asset Class Rationale
n
Equities are shares of ownership in companies that
can provide capital appreciation and income over
time. Equities have historically outperformed other
asset classes over long periods and can help you
Equities 60% beat inflation and grow your wealth. However,
equities are also subject to market risk, business
risk, and volatility. Therefore, you should invest in a
diversified mix of domestic and international
equities across different sectors and styles.
Fixed income are debt instruments that pay a fixed
or variable interest rate over a specified period.
Fixed income can provide stability and income to
your portfolio and act as a buffer against market
Fixed Income 20% downturns. However, fixed income are also subject
to interest rate risk, credit risk, and inflation risk.
Therefore, you should invest in a diversified mix of
high-quality bonds with different maturities and
durations.
Real estate are physical properties that can provide
capital appreciation and rental income over time.
Real estate can help you diversify your portfolio and
hedge against inflation as property values tend to
rise with inflation. However, real estate are also
Real Estate 10%
subject to liquidity risk, maintenance risk, and
market risk. Therefore, you should invest in a
diversified mix of domestic and international real
estate through real estate investment trusts (REITs)
or real estate ETFs .
Commodities 5% Commodities are natural resources that can provide
capital appreciation and diversification to your
portfolio. Commodities can help you hedge against
inflation as commodity prices tend to rise with
inflation. However, commodities are also subject to
supply and demand risk, geopolitical risk, and
volatility. Therefore, you should invest in a
diversified mix of commodities such as gold, silver,
Allocatio
Asset Class Rationale
n
oil, and agricultural products through commodity
ETFs or mutual funds .
Cash and cash equivalents are liquid assets that can
provide safety and liquidity to your portfolio. Cash
and cash equivalents can help you meet your short-
term needs and emergencies and act as a cushion
against market shocks. However, cash and cash
Cash and Cash
5% equivalents are also subject to opportunity cost, as
Equivalents
they offer low or negative returns after inflation and
taxes. Therefore, you should keep only a small
portion of your portfolio in cash and cash
equivalents such as savings accounts, money market
funds, or certificates of deposit.
Goals to be achieved from allocating separate funds/ portfolio for a child:
1. School Education Fund:
- Goal: To fund her primary and secondary education expenses.
- Time Horizon: Typically, you can expect to cover these expenses over the next 12-13
years.
2. College Education Fund:
- Goal: To save for her higher education (e.g., bachelor's degree).
- Time Horizon: This goal may have a longer timeframe, such as 13-18 years.
3. Foreign Education Fund:
- Goal: To finance her education abroad (if desired).
- Time Horizon: This could be a long-term goal, spanning 15-20 years.
4. Marriage Fund:
- Goal: To provide financial support for her wedding expenses.
- Time Horizon: Depending on cultural and personal preferences, this goal may materialize
in 25-30 years.
5. Entrepreneurship/Business Fund:
- Goal: To support her entrepreneurial aspirations or business ventures.
- Time Horizon: This is a more open-ended goal and may vary depending on when she
decides to pursue a business opportunity.
6. Emergency Fund:
- Goal: To have a separate fund for unforeseen expenses or emergencies.
- Time Horizon: Ongoing; maintain this fund throughout her life.
7. Retirement Fund (optional):
- Goal: To start saving for her retirement early in life.
- Time Horizon: This goal extends over several decades, but it can be advantageous to start
early.
8. Charity Fund (optional):
- Goal: To encourage philanthropy and giving back to society.
- Time Horizon: This can be ongoing and is a valuable lesson in social responsibility.
9. Homeownership Fund (optional):
- Goal: To assist in purchasing her first home.
- Time Horizon: This goal may come to fruition in 10-20 years.
10. Travel and Experiences Fund (optional):
- Goal: To provide opportunities for travel and personal experiences.
- Time Horizon: Ongoing, with the flexibility to access funds for memorable experiences.
11. Continuing Education Fund (optional):
- Goal: To support her lifelong learning and personal development.
- Time Horizon: Ongoing; this fund can be used for courses, workshops, or certifications.
12. Health & Medical Insurance Fund:
- Goal: To ensure that your child has access to quality healthcare and medical treatment
when needed.
- Time Horizon: Ongoing; you'll need to budget for this expense as long as your child is
financially dependent on you.
13. Life Insurance Fund/ Term Plan:
- Goal: To provide financial protection and support for your child in case of your
untimely demise.
- Time Horizon: This goal is long-term and extends throughout your life as long as your
child remains financially dependent on you.
14. Legal and Estate Planning Fund:
- Goal: To cover the costs associated with estate planning, wills, trusts, and legal advice.
- Time Horizon: As needed; allocate funds when updating or creating legal documents.
