Use 'bucket strategy' to invest for children with special needs
After the initial few years of understanding the level of care the child would need, the parents need to figure out how long and at what intervals will the child need the funds inflows.
“After the initial few years of understanding the level of care the child would need, the parents need to figure out how long and at what intervals will the child need the funds inflows. And they can start with the investment part ,” says Tarun Birani, Founder & CEO, TBNG Capital Advisors. He also says parents should also take into account whether the kid is likely to have a career. This will help them to plan better.
Parents should adopt bucket style of investing for the child with special needs, says advisors. Bucket strategy of investing will help to ensure that adequate sum is available at different stages of life.
“Bucket strategy will help parents to channelize the restricted available resources towards different expenses and goals for their child at different stages of life. This investment approach will help them to make sure that the child does not face financial troubles going forward,” says Jitendra Solanki, founder, PlanSpecialNeeds.
Also read: How to estimate cost of lifetime care for a child with special needs
Solanki specialises in financial planning for families with children with special needs. He is the author of ‘Financial Planning for Families Having Children with Special Needs.’
“Simultaneously, parents will also need to plan for their retirement. Practically, this will require financial planning for two generations if the child is severely disabled and needs care throughout life,” Solanki adds.
How to go about the bucket strategy of investing?
Divide your goals or child’s money needs into four to five different buckets. The number of buckets can vary as per the needs of the child.
The first bucket can be created for emergency funds and short-term goals that need to be met immediately and up to two years. The second bucket can be for medium-term expenses that are three to seven years away. The third bucket can be created for long-term goals which will incur after seven years or more.
This will help you to ensure that the child has funds for every stage of his or her life. The asset allocation will more or less remain the same depending on your risk appetite.
Emergency fund/ Short-term goals: For first bucket of emergency funds or short term goals falling up to two years, you need to keep your money as liquid as cash. This fund can take care of any health emergency or equipment required for the child. You can keep some amount in your bank savings account or bank fixed deposit or overnight mutual funds.
There is no tax advantage in mutual funds if you are going to break the funds before three years. Short term gains on overnight funds are added to your income to be taxed as per the tax slab rate. Interest on bank deposits is added to your income and taxed as per the income tax slab rate applicable to you.
Medium-term goals: Mutual fund advisors recommend investing in debt funds for your goals of two to five years away. They say debt mutual funds are more tax-efficient than other options like bank fixed deposits. You can choose debt schemes based on your risk taking abilities. If you are a conservative investor, you can stick to liquid funds. Others can take a look at short duration funds and medium duration funds.
Long term gains on investments in debt funds held over 36 months will be taxed at 20% after providing for indexation. Indexation is a provision where the purchase price is adjusted for inflation. The exercise brings down the taxes.
Long-term goals: This will include your child’s requirement after seven to 10 years. Mostly parents with special children are extra cautious and avoid investment options which are volatile in nature. But mutual fund advisors says parents must invest in equity mutual funds to beat inflation if they want to build a large corpus.
“Equity component becomes very important to keep assets growing at a good growth rate over the long term,” says Birani.
“Equities must form a major part of this bucket’s portfolio to meet the requirement in later years of life. Ideally, any horizon above 7-10 years is suited for this bucket,” says Solanki.
It is very important for parents to review different buckets frequently. For example, if the emergency fund is depleted, they should make sure it is replenished immediately. Also, if there is any change in goals or expenses, the parents should make the necessary changes in the buckets, say mutual fund advisors.