A recent article about becoming a “Crorepati” by simply investing in the Public Provident Fund (PPF) has caught many people’s attention. The catch is “The investor must be willing to stay invested for 30 years”. In a country, where there are more Dream11 subscribers than mutual fund investors, the proclivity to earn money quickly is palpable.
Imagine the plight of parents who want to save for their children’s higher education but can afford to invest only for the coming 18 years! There is no way you can convince them to put their money in government securities or centre-backed schemes that are safe but need time to grow their money.
The need to start investing in mutual funds then becomes evident in the light of proper financial planning. For those who are unfamiliar with investing, mutual funds can be a great way to gradually accumulate wealth. First off, a mutual fund is a group of funds that are invested in a range of securities, including stocks, bonds, and combinations of these, and are overseen by a qualified fund manager. Purchasing mutual fund units essentially makes you the owner of a tiny portion of the entire portfolio. Mutual funds come in a variety of forms to suit a range of risk appetites and financial goals.
Building on the 18x15x12 formula
In the face of inflation, investing in a stock fund would be insufficient. You must have a comprehensive financial strategy in place. For example, you can make your child a millionaire by the age of 18 by investing in the 18x15x12.
A popular method for illustrating the potential of systematic investment plans (SIPs) for long-term investing, particularly when saving for a child’s future, is the 18x15x12 formula. Let’s dissect the formula:
- 18: The investment term is expressed in years here. Starting a SIP as soon as possible—ideally soon after your child is born—and sticking with it for the next eighteen years is the aim.
- 15: In this case, this is the monthly SIP amount. It is expected that you will invest ₹15,000 per month in this. This, however, is merely the start. The SIP amount can be adjusted based on your financial goals and budget.
- 12: This represents the anticipated yearly average return on your investment. It is important to remember that this is only an estimate and that actual returns could vary depending on the mutual fund and state of the market.
The following are some crucial things to remember when using the 18x15x12 formula:
- Inflation: Although a specific return is assumed in the calculation, inflation may lower the future assets’ purchasing power. You might need to think about raising your SIP or changing your expected return to account for inflation.
- Risk tolerance: The formula frequently relies on equity funds, which carry a certain amount of inherent risk but also have the potential for higher returns. Take your risk tolerance into account and adjust your SIP’s asset allocation as necessary. To balance risk and possible return, you might think about investing in a mix of debt and equity funds.
- Customized approach: While the 18x15x12 formula is a useful starting point, there are differences between the various approaches. It’s important that your investing strategy should be customized to your own financial goals, risk tolerance, and time horizon.
Having a plan in place
A comprehensive financial strategy encompasses more than just the effectiveness of SIPs, as highlighted by the 18x15x12 formula. The following things to think about for your child’s future:
- Establish SMART objectives for your child’s education or upcoming needs.
- Establish an emergency fund so you can cover unanticipated expenses without compromising your SIP contributions.
- Make a strategy to effectively handle current debt while reducing its negative effects on your financial objectives.
- Speaking with a financial counsellor may be beneficial. They can help you create a customized plan that takes into account your child’s future goals, risk tolerance, and specific financial situation.
Through careful planning and careful consideration of these factors, you can use the 18x15x12 formula and SIPs as a useful part of your overall financial plan for your child’s future.
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Published: 31 May 2024, 12:14 PM IST
