Planning the exit

Simply investing does not ensure that you will be able to provide the required financial support for your child's higher education. No doubt, making investments is the preliminary requirement for this purpose. But you will be able to achieve your goal only if you are able to utilise the accumulated amount at the defined time.

Spending for your child's higher education is usually a very well-defined goal in terms of time. It will surely occur at a particular time. If your child is 5 today, he would turn 17 in a time frame of 12 years and probably, that is when you would need the money for his higher education. It is a nonnegotiable goal and bound to happen at a pre-defined time. You would not mind postponing any other goal, like buying a new car, by a year or so. However, when it comes to your child's education, you cannot afford to delay it. And here comes an important question—how would you be able to utilise the accumulated corpus at the appropriate time? Here are some guidelines:

Be conservative
Goals can be of two types—negotiable and non-negotiable. Although you can compromise your negotiable goals, you cannot do the same for your nonnegotiable goal like the higher education of your child. Hence, it is always beneficial to be a little conservative while planning for such non-negotiable goals. Aim for a corpus that is little more than what you think would actually be required.

For example, if you think you would need 25 lakh, then target and invest for a corpus of 30 lakh. The other way could be to assume a little less returns on your investments during the accumulation phase. For example, if you generally assume a return of 12 per cent on equities, tone down your assumption to 10-11 per cent. Through this, you would automatically be able to accumulate a larger corpus.

Crash-proofing your equity investments
Consider a scenario like March 2020 when the markets slumped worldwide, owing to the COVID-19 pandemic. The Sensex was down to 25,981 on March 23 from 41,306 at the beginning of 2020. It was a fall of about 37 per cent. Imagine what would have happened if your child's education goal had been due in early April or the end of March, with all your money in equities. A corpus of Rs 1 crore at the beginning of 2020 would have reduced to just Rs 63 lakh.

Equities are volatile by nature. You should never wait till the last moment if you have invested in equities. It is equally important to set up a systematic withdrawal plan (SWP) and stagger your exit like you stagger your investments through a systematic investment plan (SIP). Ideally, you should start gradually moving from equities to a safer avenue like bank deposits or debt funds about 18 months to two years before the goal falls due.

An SWP is the other side of the investment equation. It is the reverse of SIPs and helps you systematically exit equities. The process involved is simple: when you set up an SWP, a part of your accumulated corpus is transferred to your bank account monthly. So, you don't exit at one go, rather over a period. Just as SIPs help you average your investment cost, SWPs help you average your withdrawal. This ensures that you don't sell out at the bottom. Of course, this also means that you don't sell out at the top either. But then without the benefit of hindsight, who can tell when the market has made a top? And certainly, no one would like to take that kind of a risk with such crucial financial goals.

The SIP-SWP study
Value Research conducted a study on the past returns of the Sensex. In our study, we set a goal of accumulating Rs 1 crore by investing in the Sensex over any 10-, 15-, or 25-year time periods since its inception in 1979. Overall, there were 373 instances of 10-year periods, 313 of 15-year periods and 193 of 25-year ones. For each of these horizons, we considered the following SIP-SWP combinations:

• SIPs in all years, no SWP
• SIPs in all years except the last one year and SWP in the last year
• SIPs in all years except the last two years and SWP in those two last years
• SIPs in all years except the last three years and SWP in those three years

For instance, for a horizon of 10 years, the following are the different combination of SIP-SWP periods: 10-0, 9-1, 8-2 and 7-3 years. Also, note that we didn't assume any returns on the corpus that has been withdrawn. Normally, you would keep the corpus withdrawn in a bank account or in a debt fund, which will earn you some extra returns. However, to be conservative, we didn't consider those returns. Also, we assumed that the units accumulated at end of the SIP period were redeemed uniformly over the SWP period.

Next comes the SIP amount. How much to invest? For that, we considered two return scenarios: 10 per cent and 12 per cent. For both the return brackets, we thus had 12 samples: four each (no SWP and one-, two and three-year SWP) for the three time horizons of 10, 15 and 20 years. The table 'The SIP-SWP study' summarises the findings of this analysis. The 'success rate' indicates if the particular SIP-SWP combination delivered the required amount of Rs 1 crore.

Here are a few conclusions based on the data:

SWPs do provide downside protection: As the table shows, the minimum amounts that one would have got at the time of redemption starts to increase with an increase in the SWP period. However, your chances of getting high returns also start to diminish simultaneously, as seen from the maximum amounts. Hence, SWPs tend to moderate the extreme outcomes in both the directions.

SWPs don't ensure that you will reach your target amount: The success rate more or less remains the same with SWPs of different periods. Thus, having an SWP for a particular horizon does not necessarily improve your chances of achieving your target amount.

With equities, your time horizon matters: As the time horizon increases from 10 years to 15 years to 25 years, there is a significant improvement in your chances of achieving the target amount, as depicted by the success rates. This reinforces the investing tenet that with equities, you must have a long-term horizon. In fact, the longer the horizon, the easier it will be for you to achieve your target amount.

From the analysis above, it's evident that SWPs shouldn't be seen as a tool to help you accumulate your target amount. Rather, it's a method to not lose your accumulated corpus, especially in the event of a sudden crash. It's true that opting for SWPs can also lower your returns but again SWPs are not meant to boost your returns but protect what's already there.

Also read in this series:

1. Teach your child how to manage money
2. Investing for your child's education
3. The illusion of children-specific products
4. Education loan to bridge the shortfall