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How to invest a lump sum for my 12-year old?

A reader asks, “My son is 12 years old now and this is regarding his Higher education. I have Rs 21 Lacs lumpsum in hand. I also plan to start a monthly Rs9000/- SIP for a 5 years time period. Could you kindly advise how and where should the lump sum and monthly SIP be invested?”

“There are few articles about not investing in lump sum versus SIP. Is the 5 year time period good enough to be considered long-term to go ahead and invest in an Equity-based Mutual Fund? I am concerned and confused after the recent churn in the market.”

In the following, we assume that no other funds are available for this goal other than the ones mentioned. Also, personal finance recommendations cannot always be robotic. We will have to offer suggestions based on the situation and the products available.

The suggestions we offer to parents of a younger child will be quite different than for parents of an older child.

Also, see:

There is nothing wrong with investing a lump sum in one shot or spread over a few months in an equity fund for a long term goal. However, that is not the case here.

There are only 5 years available before the son graduates from school. Investing the lump sum in equity is not prudent. We recommend that you consider investing the entire Rs. 21 lakhs in a money market mutual fund.

Investing a small chunk of that lump sum in HDFC Corporate Bond Fund or Parag Parikh Conservative Hybrid Fund can also be considered but there comes with higher volatility.

The SIP for Rs. 9000 can be started in a balanced advantage fund like the one from ICICI. This will take on some equity and bond market risk but that is a chance you can take (or have to take) considering most of the child’s UG education can be funded from the lump sum amount. If possible try and increase the investment amount immediately or as soon as possible and as often.

The balanced advantage option is risky over 5 years but expenses for UG are spread over 4 years so there is some time for recovery. A less risky opinion (relatively) is to start a SIP in Parag Parikh Conservative Hybrid Fund.

Some may argue, “why not invest a part of the lump in the balanced advantage fund?”. It depends on the reader’s ability to increase monthly investments. If he easily invests more than 9K over the next few months then perhaps such a (small) risk can be taken. If not, no. We however do not recommend it regardless. There are many solutions to any problem. We will have to choose a path most comfortable to our temperament.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.

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