11/11/2014
Confused about investing right? Take a cue from how you pick your child's career.
- Uma Shashikant
Children elicit better behaviour from their parents. I have seen carefree spendthrifts turn into diligent savers after the arrival of a child. In the modern times of hyper-involved parenting and indulgence, nothing but the best will do when it comes to children. Social scientists say that when parents believe their child will have a better life than themselves, the society changes for the better. As a finance professional, however, I see parents living in the archaic old world when it comes to money, even while they dream the big dreams for their children. This needs correction.
Simple earners, including domestic help and drivers, send their children to English medium schools. They spend on additional coaching for the children and enroll them in summer classes. However, when I check with parents across the income sprectrum about how they are saving for their children, I find that they invest in recurring deposits with banks or post offices, or have saving certificates or the PPF. While none of the children are going to government schools, the money is saved with the government. Parents have the energy, resources and aptitude to check the pass percentages of schools, quality of teachers, type of peer group, distance from home, timings, fees and other variables with great
ease. However, they believe that checking the past performance of an equity fund, its fund managers, its peers, costs and terms might be a complex task. It is not clear to me how the two are different.
The usual refrain is that a precious goal, such as the future of a child, cannot be subjected to the risk of equity markets. Many parents say they are fine with settling for low returns since the risk is also low. The same parents, however, are very clear that without the additional coaching, the child is not likely to score the desired marks in the
board exams. They are willing to join the few lakhs that write the IIT entrance exams, even if the probability that the child will make it is too low.
The approach is aggressive when it comes to pushing the child to do more, but the saving that is supposed to fund this dream education sleeps and snores in the low-yielding recurring deposit accounts. Just as the child needs that additional push, the savings also need the extra kick to get bigger. If engineering or medical degrees are chosen for a better income when the child becomes an adult, why should the money be admitted to a low-return, poorly performing basic degree course? The math is actually quite simple. If a parent desires a good professional education for the child, as most do these days, the money needed to get there is not small.
The cost of education is moving up sharply, thanks to the growing demand and limited supply. If Rs 50,000 is saved every year and is invested to earn an 8% return, it will convert to a corpus of about Rs 23 lakh in 20 years. The same money deployed aggressively to earn 16% will not produce twice that number, but 2.5 times bigger corpus of Rs 58 lakh. This is the power of compounding of money over a long period of time.
A high-yielding investment is the wind below the wings of parental ambition,propelling the same amount of saving to become much bigger. It is, therefore, important for parents to understand that getting Rs 58 lakh using their conservative 8% tool will need higher annual savings of Rs 1.25 lakh for 20 years. The choice is quite simple. Either the parents work alone and hard to build the corpus needed to fund the dreams for the child, or they choose to rope
in the equity market to run along with them. The framework that they use to make the choices for their child is the one they need to extend when they make choices about investing.
Parents who ask the child to write various medical and engineering exams so that the risk of not being selected in the most desired course, intuitively understand diversification. When the choice is for a course that will provide a good start to the child's career, they know that yesterday's fad may fade away tomorrow. Just as newer professions emerge, newer businesses emerge. If private sector companies are great places to work in, they can't be poor places to invest in. A proud parent who brags about a placement at TCS or Infosys, fails to see that the stocks of such companies should also be a good investment.
I routinely see 'tiger moms' who have admitted kids to swimming classes at three years, music lessons at five and mental math and speaking abilities at six. Even the less stressed parents know that it is a bad idea to expect overnight miracles. Equity investing needs the same attitude. It requires patience over up and down cycles because it takes time to get a final product that is well-polished and good. Very few parents do 'home-schooling. They trust the school to groom the child; many take the help of coaches and mentors to help make the right choices; they are willing to pay the fees as needed and know that every child in the class will not stand first. It is sad that the same parents think that equity investing involves buying a few stocks
based on tips and tricks; they suspect fund managers and financial advisers; they are reluctant to pay the fees and costs, and they expect their money to earn the best returns with the lowest risk.
If the process is what parents trust when it comes to education, and if that process involves a good combination of their efforts and information, as well as the expertise of an external party, the same should work when it comes to investing. A well-diversified equity fund, managed by a professional, selected and monitored by an adviser, is likely to replicate what they do with their child, to what they do with the money meant for the child.
If it is a bad idea to keep your child at home since you can't take risks, it is a terrible idea to let your money sleep because you do not understand equity markets or think it is too risky.
