Reader's corner: Is Mutual Fund a better long-term investment for a child?

Does it make sense to buy a term plan for a housewife, given that she does not earn?

It does not make sense to do so as there is no one financially dependent on the housewife. A small amount of term plan may be obtained from an emotional point of view. I don’t think most insurers will be willing to underwrite this policy for a large amount.

Gilts and long-duration funds have done well in the recent past, offering better returns than short-term funds. If I want to take exposure to longer-duration funds, which category should I opt for, and how much should I invest at this point of time?

Longer-duration funds may provide higher returns but are more sensitive to interest-rate changes. This must never be forgotten. With these kinds of funds, there is always the risk of potential loss of capital, albeit a very small percentage. Yes, long duration funds will make more returns in the longer run than short-duration funds, for sure. Both have their own purpose. If you have money to park for a shorter time period, then consider short-term funds. If you want to invest in debt for a longer period, you may consider medium to long-term funds. In that case, you should accept the volatility and hold on for the long term.

I want to start teaching my children – below 10 – about money. How do I go about it?

There are many things you can do. Open a bank account and let them read the bank statement. This is empowering. Ask them to help in the house or do small errands, and give a small reward for doing so. Deposit money in a bank account and let them see the bank account grow. Let them understand that money is earned in exchange for work. Send them under supervision to buy something on their own. Involve kids everywhere possible.

Does it make sense to liquidate investments and pre-pay a home loan, or should an individual continue with his equated monthly instalments (EMI)? I have equity mutual fund investments and about five years to go in the loan tenure.

Pay EMIs according to schedule even if you have free cash flows available. Prepayment of loan makes sense only when your investment generates lower returns than the home loan interest rate. However, in your case, your investments will earn much higher returns. You may consider utilising the profits of your investment to pre-pay the loan. Do not dig into your capital as you have taken pains to build it over time.

If my fund is not performing well and I want to switch it, should I withdraw everything at one go and invest a lump sum in another fund, or should I withdraw money in parts?

The best part about mutual funds is their high flexibility. You can do anything that you please. You can buy in lump sum or parts; you can sell in lump sum or in parts. You can sell a fund and invest in another of the same category/sector or a completely different one. Historical performance is good enough evidence for the ordinary investor to make a decision regarding investments.

Between a recurring deposit (RD) and a mutual fund, which is a better long-term investment for my child?

You must consider a systematic investment plan in an equity mutual fund. That is the sure shot way to create wealth over a period of time. RD may be considered when you are planning for an expenditure that you are likely to incur in the next one to two years. Recurring deposits help in meeting big-ticket expenditures without disturbing your long-term investments, and more importantly, prevent you from taking unnecessary loans.

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