How to get Rs 1 crore on 18th Birthday of your Child?

Having Rs 1 crore when your child turns 18. How would that make you feel? I am sure pretty good.

18 is the age which would be pretty close to when your child would have just begun his/her higher studies. And if you play your cards well, then you have a good shot at having a solid corpus of Rs 1 Crore for their bright future.

And even if you understand that inflation will reduce the value of Rs 1 crore after several years, the fact is that it’s still a decent number to aim for (and assuming you haven’t started investing for your children properly till now).

Isn’t it?

I think so. Assuming that you have in mind to save Rs 25 lakh in today value for your child, then considering 10% inflation, you will need Rs 78 lakh after 12 years (for a kid aged 6 today) or Rs 1.04 crore in 15 years (for a kid aged 3 today) or Rs 1.39 crore in 18 years (for a kid aged 0-1 today).

So Rs 1 crore in future value seems like a good aim to have. At least initially. And it sounds big but it’s fairly achievable.

And what can this Rs 1 crore be used for?

I guess primarily for providing a good education for your child. Or to send them abroad for higher studies (do read the cost of studying abroad (in foreign) for your children). Then for (if you wish) to fund their marriage. Most importantly, it will be to fulfil your responsibility as a parent. That’s it.

But just the intent won’t get you there.

You got to save and invest money for it.

So…

What needs to be done for you to have Rs 1 crore when your child turns 18?

Depending on how old your child currently is, you would need to begin investing the required amount as soon as possible in the right allocation for the goal.

And how much would that be?

Let’s answer that question in the rest of the post:

• If your child is currently aged 0 (i.e. is about to be born), then you have 18 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 85-15:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 14-15,000 per month in ratio 85:15 Equity:Debt for 18 years.
• If your child is currently aged 0-1, then you have 17 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 85-15:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 16-17,000 per month in ratio 85:15 Equity:Debt for 17 years.
• If your child is currently aged 1-2, then you have 16 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 85-15:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 18-19,000 per month in ratio 85:15 Equity:Debt for 16 years.
• If your child is currently aged 2-3, then you have 15 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 85-15:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 21-22,000 per month in ratio 85:15 Equity:Debt for 15 years.
• If your child is currently aged 3-4, then you have 14 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 75-25:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 25-26,000 per month in ratio 75:25 Equity:Debt for 14 years.
• If your child is currently aged 4-5, then you have 13 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 75-25:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 29-30,000 per month in ratio 75:25 Equity:Debt for 13 years.
• If your child is currently aged 5-6, then you have 12 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 75-25:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 33-34,000 per month in ratio 75:25 Equity:Debt for 12 years.
• If your child is currently aged 6-7, then you have 11 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 75-25:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 38-39,000 per month in ratio 75:25 Equity:Debt for 11 years.
• If your child is currently aged 7-8, then you have 10 years to invest. Assuming a higher allocation to equity, i.e. (let’s say) 60-40:Equity:Debt with assumed returns of 12% from equity and 7% from debt, you need to invest Rs 47-48,000 per month in ratio 60:40 Equity:Debt for 10 years.

So its quite clear from the above data that the earlier you start, the lesser you need to save every month and hence, easier it would be on your cashflows.

Since it’s a pretty long term goal (assuming you decide to pursue this goal of Rs 1 crore for your child’s 18th birthday when he/she is still young), then investing more in equity is the suitable approach given the fact that equity has proven time and again (like here and here) that it delivers superior inflation-beating returns in the long run.

Note – If you have other SIP amounts in mind for this goal that you want to begin with and want to see how much corpus you can create, then do check the following posts Rs 5000 SIP or Rs 10,000 SIP or Rs 15,000 SIP or Rs 20,000 SIP or Rs 25,000 SIP or Rs 50,000 SIP or finally Rs 1 lakh SIP.

But do note that I have consciously reduced the equity allocation as the number of years available for the target reduced. That is the prudent approach to manage risk in the portfolio. But if you want, you may choose a higher or lower equity allocation depending on whether you are an aggressive, balanced or conservative investor. The required investment amount will change accordingly.

Also, here we have assumed a constant asset allocation. In reality, you will have to gradually keep on reducing the equity % of the portfolio as you get closer to the year of goal.

Another assumption is about the expected returns of 12% from equity and 7% from debt. These two figures can also be changed and the required investment amount will change accordingly.

I have seen many people assume long-term equity returns of 15% and even 18%. Its possible no doubt. But its probability is low for most investors. If it happens, then it will be great for them. But if it doesn’t, they will end up with a lower corpus. But being realistic about return expectations is absolutely necessary. Why? Because for example, if your return expectations is 12%, then this means that you will be making a higher monthly contribution that what would be required for an 18% return assumption. And given the nature and realities of stock markets, you will have a higher chance of reaching your target corpus of Rs 1 crore even if the actual returns achieved are less than 18% (but of course more than or equal to 12%).

So it’s true that the higher the return expectations, the lower the required monthly investment. But the problem with high expectations is that they are hardly met. So even if some equity funds have managed to deliver 15% in the past 20 years, it is difficult to guess what returns these funds (or other funds) will give over the next 10-20 years. So by keeping your expectations low, the chances of ending up with less than Rs 1 crore are further reduced. And you improve your odds of reaching your goal of Rs 1 crore when your child turns 18.

I have ignored the impact of taxation here for simplicity. But in reality, due to LTCG tax on equity investments, the actual amount that you need to invest will vary and will be slightly higher.

Also, you won’t get same returns every year. So that should also be kept in mind while considering these numbers.

Talking of investing in equities for long-term important goals like children’s education, I think for small investors, investing small amounts regularly in equity funds via SIP is the best bet. Pick a focused portfolio of good diversified equity and debt mutual funds and continue to invest with discipline regularly. I cannot emphasize the importance of picking the right mutual funds for portfolio enough.

Also, keep monitoring your mutual fund portfolio closely. There will be times when returns won’t be acceptable. That’s fine. There will be good days and there will be bad days. But what’s important is for you to stick around and have the discipline to keep investing for several years.

If you can do fund selection properly without being influenced by the wrong people or blindly relying on mutual fund star rating (which is wrong), then it’s fine. But if you genuinely need help and aren’t sure whether your investment plan is right or not, it is much better to get in touch with an investment advisor to help you with good recommended equity mutual fund portfolios that are based on your risk appetite and feasible SIP amounts.

I must say something about another goal here that often gets compromised when people invest in their children. Your retirement. While you are investing for your children, please please(!) please(!) do not forget to invest for your retirement at the same time as well. This point can’t be emphasized much.

Related Reading: How to build a Retirement Corpus of Rs 5 crore?

Remember that saving for your children’s future is not your only goal. You have many others.

And what to do when you have several goals that compete for your assets and savings? It’s best to first identify your real financial goals (How to identify? Use this Free Excel sheet for Goal Planning) and then, invest in them properly.

And one solid way to invest properly for all your goals is to do Goal-based Financial Planning. Just randomly investing here and there won’t take you anywhere.

So go on and do what is needed. Don’t wait too much to begin investing when you have a goal of Rs 1 crore for your child’s 18^th birthday.