How to Plan Investments with Special Needs Child Care?

Investment planning for families with special needs children is not easy. Deciding on a specific asset class is difficult as the care of a special needs child is lifelong. Many families tend to be risk averse and do not consider volatile investment options, like equities.  Others may go heavily into  real estate for a regular income from rentals.

Investment planning may not be difficult, but it’s not simple either. One needs to choose the right asset mix to ensure that desired returns can be met without exposing your portfolio to a risk higher than one can tolerate.  Having said that there are asset classes which may be volatile, but are needed to generate returns over and above inflation. Contrary to this some asset classes may look fascinating but carry disadvantages which can hurt wealth accumulation for the child. Hence the selection of a particular asset class should be based on a clear objective.  Secondly there are employer benefits for salaried individuals which may form a major chunk of savings to ensure a legacy for the child.

Investment Options

Here we look at investing options and what special needs children families must do to ensure the investment mix helps in fulfilling their future requirements:

  1. Employer Benefits– EPF, Superannuation, Gratuity, NPS are some employer provided benefits. Generally, these benefits have an advantage over other avenues and should therefore be the first option to maximize contribution for the child’s corpus. Over a long working horizon, these options help in accumulating  good wealth to provide for long term child care.
  2. Equities: There is no second thought that equities deliver inflation beating returns over a long term. But with a special needs child, parents are often extra cautious and avoid investing in this asset class due to its volatile nature. But returns and risk go hand in hand. If the nature of equities is high volatility, then this is the asset class which also has the capability of delivering higher returns. Research has proven that in equities, the probability of loss decreases as you hold your investments for more than 15 years. Thus, for long term wealth accumulation, equities must form a major part of the investments.
  3. Debt – Comprises of employer benefits such as EPF, small savings schemes, banking products like RD, FD, bonds issued by government and corporate and debt mutual funds. EPF and Small savings schemes like PPF are considerable options for wealth creation. On the other hand, bonds like tax free bonds, perpetual bonds by corporates or other such options provide a good opportunity to generate a regular income. Then Debt mutual funds offer various schemes for meeting objectives with  different time horizons. The long term wealth creation portfolio can include debt mutual funds schemes such as Income and Gilt Funds for long term investments while short term objectives such as emergency funds can be invested in short term schemes of debt mutual funds such as Liquid Funds or Ultra Short Term Funds. Thus, investments can be for as low as one day up to as high as 10 years.   For special needs children families’ having these products in their investment portfolio is a necessity as it can provide a downside protection to the investment portfolio and can generate the much needed fixed income for child care. Which debt scheme to choose rests on the stage at which you initiate planning.
  4. Real Estate– Real estate investment opens up a fascinating world. Real estate has been the favorite asset class for all categories of investors – Big or Small. For special needs children families, housing is surely an important consideration and a house for the special needs child will be a larger goal to meet. But for investing, real estate is considered more as an asset class to generate regular income. If we look at the needs of these families, it may fit right into their requirements. But rental yields from residential houses are too low to choose it as an investment option. With 2-3% yield these do not even match the inflation, leave aside generating returns over it. Real estate investment also requires a huge capital and going high on EMIs is surely a mistake to be avoided.  Commercial properties do give a higher yield but the capital required is far higher and managing it is a difficult proposition especially for such special needs families.  Lastly, it’s a highly illiquid asset class and the period of downside can stay much longer that even equities. Considering all these factors and today’s scenario, it’s better to avoid real estate as an investment option. But with regulation of the Real Estate sector, we will soon see the emergence of new products from this asset class such as REITs. Then this sector can emerge as an investment avenue for long term wealth creation.
  5. Other Options– There are other investment options like Sovereign Gold Bonds, ETFs, Tax Free Bonds etc. which have come into the market recently. New options may emerge in future. Some of these can be a good selection for meeting specific requirements. It’s ideal to evaluate these options based upon the unique needs of families.

Investment planning is an integral part of wealth creation. Many mistakes happen because we take this very lightly. While creating a financial plan, once the requirements are known, consider choosing the right investment options after due analysis on different parameters. It’s good to consult a professional as markets, be it equity or debt, needs expertise to make the right investment decisions.

Investments With Asset Allocation

Asset allocation is an approach where you do not invest in a single asset class but diversify the value of your investment across different asset classes: Equities, Debt, Gold, Real Estate and others. For example, when you need to invest Rs 1,00,000, with the asset allocation approach, you may invest Rs 50,000 in equities, Rs 20,000 in debt, and Rs 20,000 in gold and so on. The benefit of this approach is not in maximizing returns but lies in curtailing the risk of under performance from an asset class.  In the long term, this approach contributes more to investment performance of your portfolio then the selection of securities.

But many investors fail to follow a defined asset allocation approach. There are two reasons for this mistake. One is the fascinating returns produced by any single asset class, which lures them to chase it. The other reason is unawareness, which also leads to investing more in an asset class which might not suit their risk appetite. Result of this strategy is disappointment, after which investors have to rejig their portfolio.

There is no one answer fits all for asset allocation approach.  Your financial situation decides what mix of assets you should follow for your investments. While many investors are advised to invest in equities with a standard age formula i.e. 100 minus age – financial planners go by the actual assessment of one’s risk tolerance. There are certain thumb rules which  are popular across the globe like invest in equities as per goal horizon i.e. stay invested till when you need the money or invest your money as per your loss tolerance level i.e. how much downside you can see in your portfolio before you starts panicking or wiser play safe and take a 50-50 approach i.e. Invest 50% in equity and 50% in other asset class.

But all such thumb rules are standard advice, which may appeal to certain investors.  Your age, number of dependents, your liabilities, current financial situation i.e. how much you are able to save and what provisions you have made for your goals, your current investments, and many other factors decide what allocation will suit your financial situation. Without analyzing these factors, any approach you follow or are advised to follow may not bring the desired outcome.

Thus while investing for your family’s future, it’s ideal to follow this approach. There are model portfolios that many advisers follow for different risk profiles which I have listed below. But these should not be taken as the standard and changes must be made according to your financial situation.

Sample Asset Allocation

Sample Model Portfolios 

Understanding The Bucket Strategy For Investments

Even after knowing the optimum asset allocation, there is one more aspect to be addressed while making an investment decision. How must the contribution be divided so that different needs at different stages of life may be addressed. There are short medium and long term goals to be achieved and a need can arise at any time. There is a need for accumulating wealth which will be needed much later and there is a need for regular income which may arise at any time. Thus there is  need for a fund which can address regular income and a fund which can address all other goals.

It’s difficult to decide where the savings should be invested which can accumulate these two desired corpuses. Any wrong choice here can deplete the funds earmarked for child benefit. But on the other hand, the entire fund cannot remain in a savings account or a FD which will deplete the child’s corpus much faster. While parents are alive, the need for a regular income gets fulfilled from the regular income they earn. But in case of an eventuality, when both parents are not there, the responsibility of meeting financial requirements rests completely on the Trust created for special need dependent which has to ensure its fulfillment from the assets available in the Trust.

How To Invest With Creating Buckets for your goals?

A bucket strategy works well when there is need for a regular income and a simultaneous need to grow the corpus  for the later years of life. Here you do not need separate asset allocation, but allocate the funds separately in the same strategy. With a special needs child there can be five  Buckets which can be considered:

  1. Cash – A safe investment option where money market funds, short term funds or bank deposits can be considered, which provide for a regular income in immediate two
  2. Conservative Portfolio- A portfolio which lies more in debt investment and meets requirement for the next 3-5 years post bucket one.
  3. Moderate Portfolio -This part of the bucket will mostly rely on options where a small portfolio can bring growth in the investments while the remaining portion helps  to keep the corpus safe. Generally, 6-10 years post bucket 2 is what this bucket fulfils.
  4. Growth Portfolio- a complete growth option probably in equities to ensure this part of the corpus grows to a good amount which can meet the requirement in later years of life. Ideally any horizon above 10 years is suited for this bucket.
  5. Emergency Bucket- This bucket will meet any need that may arise in between these periods. A need of support equipment for the child, health emergency, etc… can be fulfilled with this option.

The benefit of a bucket strategy is that it helps you in channelizing your funds to meet the right requirements. What stage of life you adopt this strategy also needs consideration. You may not need it while you are earning or it may take a while for creating these accounts. The objective is to be prepared for any eventuality and chose the right options for your limited resources.

Thus investment planning should be done with proper care. Though lifelong care of special needs child is a priority having right assets and avenues is important. Parents should prepare an investment strategy which is probable of generating good growth on investments.

About the Author

Jitendra P.S. Solanki

Jitendra is a SEBI Registered Investment Adviser (INA10000184) and has earned the much-respected professional designation of Certified Financial Planner (CFPCM ) and Chartered Trust & Estate Planner (CTEPTM). He is a post graduate from IIT - Roorkee and has spent 15 years in Financial Services Industry working with leading financial institutions & Banks, advising families on their Financial well-being. Jitendra specializes in advising families with special needs children on various financial & legal aspects.

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