scorecardresearchWant to start investing for your specially-abled kid? Here are the options
A disabled child has special needs. This mandates bucket-style investing to secure his or her future.

Want to start investing for your specially-abled kid? Here are the options

Updated: 13 Dec 2022, 08:06 AM IST
TL;DR.

  • The bucket strategy of investing will assist in ensuring that an adequate sum is available at various stages of life. Here, you divide your money needs depending on the extent of disability your child suffers from.

As specially-abled children are not in a position to plan their finances, the parents need to plan the investments well on their behalf early in life.

After the first few years of determining the level of care their child will require, the parents must determine how long and at what intervals the child will require the funds’ inflows. Based on the needs, here are the options parents can opt for:

Basic investing

You may start with very basic investment option like the Public Provident Fund (PPF) that requires you to pay for 15 years. The maximum amount you can put in a PPF account is 1,50,000 a year. This means that you can stay put for the next 15 years which can be extended to five more years, thus, allowing your minor to benefit from the value of compounding on 20 years’ worth of investment. You can also redeem the amount after 15 years and start a fresh PPF investment for the coming 15 years, thus, continuing with your investment spree sans any risk.

If it is a girl child, you may consider putting money in the Sukanya Samriddhi Account Scheme till she turns 18 years old, which translates to an adequate accumulated corpus by the time she attains majority status. Since a lot also depends on how long you wish to stay invested along with your risk profile, the aforementioned investment options may be best if you are looking to save and invest for her till she turns 18 years old.

Resort to bucket strategy

The bucket strategy of investing will assist in ensuring that an adequate sum is available at various stages of life. Here, you divide your money needs depending on the extent of disability your child suffers from. Define your child’s needs with possible money goals and then divide your investments into different buckets which are:

Emergency or short-term money goals

The first bucket is always about setting aside enough for your child’s emergency needs, which means that you must allocate enough money to liquid fund investments. These may include fixed deposits, recurring deposits and debt funds that include overnight funds and liquid funds. So, whether you need the money within a month or a year or five years, having money in these funds will ensure that you never run out of liquidity. The returns on these funds are, however, low.

Short-term gains on overnight funds are added to your income and taxed at your marginal tax rate. Interest on bank deposits is added to your income and taxed at the applicable income tax slab rate. Some of the well-known short-duration funds are ICICI Prudential Short Term Fund, Axis Short Term Fund, Aditya Birla Sun Life Short Term Fund, and HDFC Short Term Debt Fund.

Medium-term money goals

You may opt for medium-duration funds that will serve your purpose for the coming five years or so. For example, the ICICI Prudential Medium Term Bond Fund earns a bit over seven percent returns. The Axis Strategic Bond Fund has earned nearly 7.28 percent returns in the past five years. The returns barely beat the inflation rate though the same will help to meet your sudden needs. With so many funds to choose from, there should be no dearth of investments from which you may choose.

The gains on debt fund investments held for more than three years will be taxed at 20 percent post indexation. Indexation is a provision that adjusts the purchase price for inflation. Taxes are reduced as a result of the exercise, thus, giving you a way to save your money on taxes too.

If you are looking for a continued source of income while also allowing your money to grow in the medium term, say eight years, you may put some money in Sovereign Gold Bonds (SGBs) that promise 2.5 percent annual returns while adequate capital appreciation at the time of maturity. Also, SGBs are a better alternative to physical gold holdings. The amount of gold paid for by the investor is protected because he receives the current market price at the time of redemption/premature redemption. Storage risks and costs are eliminated. Moreover, the maturity amount from SGBs is not subject to tax, thus, leaving you with enough money to meet your child’s medical or other needs after eight years or so.

Long-term investments in mutual funds

You do not know how long the child would continue to depend on you. Some specially-abled children require lifelong care that can be taxing on parents, especially, during their old age. Also, the investments that promise fixed returns are not enough to beat the rising impact of inflation. To ensure that your child has a financially secure future, it is important that you start investing in mutual funds early in life.

While many question the validity behind parking your earnings in mutual funds, you must remember that the equity component becomes critical in order to keep assets growing at a good rate over the long term.

Index funds

If you are investing in mutual funds for the first time in your life, you may as well start with index fund investments. Choose among the given list of Nifty50 or Nifty100 or Sensex-based funds. Some index funds are also market cap based, thus, lending you enough access to the midcap or small-cap sector.

For example, the HDFC Index Fund - S&P BSE Sensex Plan has gained immense traction owing to its high returns. The UTI Nifty 50 Index Fund is another fund that has earned returns beyond most other mutual fund investments. The Nippon India Index Fund and LIC MF S&P BSE Sensex Index Fund are others that many consider when it comes to investing for the next 20-25 years.

You can start with a small systematic investment plan (SIP) in any one or more of these funds to stay invested for the next 20-25 years. Statistics suggest that many index funds have outperformed most other mutual funds in the market, thus, justifying the idea to include at least one index fund in your investment portfolio. If you step up your investments by a fixed percentage annually, the corpus would be much higher, and in line with your idea of the much-desired corpus.

The following table will help you understand how regular and systematic investments for the next 25 years in an index fund will yield you enough that you may leave behind as a legacy to your disabled dependent(s).

Name of the fund

Invested amount 

(in Rs)

Rate of returns 

(in %)

Investment tenure 

(in years)

Maturity amount

(in Rs)

HDFC Index Fund - S&P BSE Sensex Plan30,00,00013.62252,54,32,784
UTI Nifty 50 Index Fund30,00,00012.77252,17,88,040
Nippon India Index Fund30,00,00013.71252,58,56,039
LIC MF S&P BSE Sensex Index Fund30,00,00013.29 2,39,44,211
Source: MoneyControl

Children’s funds

Next in line, you may choose a children’s fund with a good track record. Check the fund returns over the past five to 10 years along with ratios that hint at their risk-return factor or their inherent stability. Take for example, the HDFC Children’s Gift Fund which delivered 12.94 percent returns in five years.

Name of the fund

Invested amount 

(in Rs)

Rate of returns 

(in %)

Investment tenure 

(in years)

Maturity amount

(in Rs)

HDFC Children’s Gift Fund24,00,00012.94201,13,60,867
Axis Children’s Gift Fund24,00,00011.332091,29,148
Source: MoneyControl

Other mutudal funds

There are other funds too that you may explore, thus, lending you enough options to choose between funds depending on the financial goals that you had planned for your kid. For example, if you wish to invest only in stocks of the top large-cap and mid-cap companies, you may choose from any of the large-cap and mid-cap funds available. These long-term investment options befit long-term investment in bucket strategy, thus, allowing you to anticipate the amount of corpus you can accumulate in the future.

There are flexi-cap funds that have gained the attention of many investors. Say, if you are investing for the next decade or so, you may try putting some money in these funds for adequate returns.

You may step up your investments by 10 percent on a year-on-year basis to accumulate more money with gradual investing. The following table highlights how stepping up investments can help.

Name of the fundNature of the fund

SIP 

(in Rs)

Annual Step Up

(in %)

Rate of returns 

(in %)

Investment tenure 

(in years)

Maturity amount

(in Rs)

HDFC Index Fund - S&P BSE Sensex PlanIndex Fund10,0001013.62253,83,22,180
UTI Nifty 50 Index FundIndex Fund10,0001012.77253,33,13,775
Nippon India Index FundIndex Fund10,0001013.71253,88,90,104
LIC MF S&P BSE Sensex Index FundIndex Fund10,0001013.29253,63,03,076
HDFC Children’s Gift FundChildren’s Fund10,0001012.94253,42,66,056
Axis Children’s Gift FundChildren’s Fund10,0001011.33252,61,28,814
Canara Robeco Bluechip Equity Fund Large Cap Fund10,0001015.77255,41,94,573
Edelweiss Large Cap FundLarge Cap Fund10,0001013.98254,06,39,869
Quant Large and Mid Cap FundLarge and Mid-Cap Fund10,0001015.84255,48,01,655
Tata Large & Mid Cap FundLarge and Mid-Cap Fund10,0001014.67254,54,42,507
PGIM India Flexi Cap FundFlexi Cap Fund10,0001016.91256,49,19,593
Kotak Flexi Cap FundFlexi Cap Fund10,0001012.57253,22,23,391

Investing money is not enough. A timely review of your investments is equally important. Parents of disabled children must review their investments regularly. For example, if the emergency fund is depleted, they must replenish it immediately. Also, if the parents' goals or expenses change, they should make the necessary changes in the buckets.

Last but not the least, adequate life insurance can bridge the gap between your child’s financial needs and the financial goals you have set out for him or her. 

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First Published: 13 Dec 2022, 08:06 AM IST