Sunidhi entered home elated with her class's tenth board exam results. As usual, she came first in her school and there was a good chance that she may be the district or even the state topper. The excitement was so palpable, that the moment she entered the living room, her parents were both clapping and cheering her. It was a given that the stream Sunidhi would opt for will be science with subjects being Physics, Chemistry and Mathematics.
While this was a happy moment for the family, Sunidhi’s parents were already thinking ahead in terms of college admissions, coaching institute admission and the associated costs. Over the past several years, they had been saving money in fixed deposits and mutual funds to develop a kitty towards Sunidhi’s education both in India and overseas.
Now their financial goal visible on the horizon, her parents knew they cannot afford to lose any money in the market. It was planned that Sunidhi will be pursuing her Masters either in the United States or Australia. In case if the funds proved to be insufficient, the backup plan was taking a loan with house as the collateral. They reasoned that they have many more working years ahead of them and can comfortably prepay the loan.
While this planning was good, what they missed out in the interim was checking with Sunidhi on the stream her desires to pursue. When finally, the conversation about admissions started, her parents were in for a shock when Sunidhi announced that she wishes to pursue Economics in college, preferably DU, and then MBA from IIM. This means what she needs to focus now is on CUET – the entrance exam for all central universities – which will take her to DU and thereafter entrance exam CAT for IIMs.
Given this setting, it was clear that the funds they had earmarked for education purposes would be enough and more to meet their daughter’s needs. In fact, they will be left with excess funds to the tune of Rs. 25 lakhs. While the prospect of excess money was a relief, it was decided that they all could go on lavish international vacations whenever possible. Thankfully before they could execute on this plan, a well learned uncle of Sunidhi presented a different proposition.
The uncle’s idea was simple and straight forward - invest the surplus 25-lakhs in an equity oriented hybrid fund. After all, a penny saved is a penny earned. Even with a moderate 10 per cent annual return, after five years, the money would have growth to Rs.40-lakhs by then. When Sunidhi heard this she was excited to know how this growth is corpus takes place. This is where her uncle decided to introduce the future economist to the eighth wonder of the world – Compounding!
He explained how Albert Einstein called compounding the eighth wonder of the world. For good measure, the uncle added the often used quote as well – “Those who understand it, benefit from it, and those who don’t, pay it.” With the help of simple calculations, the uncle showed how compounding helps create wealth over the long term. It is very much possible that such situations may be playing out in several households in the country. There is no end to the human instinct to splurge. While celebrating and splurging once in a while is fine, it should be at the expense of a future financial goal. In this case, the parents can invest the excess money from the education fund and create a kitty which they can leave behind as a legacy fund for their daughter.
The magic of compounding over several decades will ensure that the amount is large enough to take care of several financial goals of their daughter in her adult life. By investing early on in a disciplined manner, parents can build a sizeable kitty for their kids which can be used for any purposes the kid desires as they come of age. This is the biggest gift a parent can give to their children. At the same time, remember to teach them how investing is done and the power of compounding. This will ensure they do not fall into the trap of splurging and losing out on the money they got as a hand-down.
By Vikas Agarwal,
Director,
ARK PRIMARY ADVISORS PRIVATE LIMITED