How I use glide path investing in planning for my child's education

It’s been three years now that I’ve been saving for my son’s higher education, so here’s how the story goes. I started personally with the goal-based framework at the Capitalmind Wealth PMS, with one of my goals being this: Plan for my kids' higher education.

We use the concept of Glide Path Investing - something we've done through our own technology built in-house at the Capitalmind PMS. Here's how it works:

What is a Glide Path?

Remember the old times when you'd get an auto and get to someone's house? Nowadays, you take transport - Uber, Ola, Auto, or drive yourself - and use Google Maps to plot the route. There's a subliminal addition: it tells you the time you will take to reach there. If you're driving, it gives you alternate routes to get there.

It's just a map that helps you chart your route, but the time isn't written in stone. It changes as you travel - the distance left, the traffic that could have changed when you have been moving, etc. It recalculates the optimum path and tells you the new arrival time as you're going.

Think of a financial route map. You need to get to a certain rupee number by a certain date. Your optimum path is to add ₹ 27,500 per month (the equivalent of 20 km/hour in a drive). This is your glide path - you know you need to get to:

₹ 29 lakh in 1 year
₹ 36 lakh in 2 years
₹ 45 lakh in 3 years
etc. till you get to the goal

Using Capitalmind Plan, you can easily build your own glide path (And our video on how to use it). I'll demonstrate how I used this to build and execute such a plan in the rest of this post.

The glide path is only good if you glide through if everything else works to plan. Often, sh** happens. If there's a terrible market (equivalent to heavy traffic on the road), you will not get to your financial goal in time. What can you do?

You can delay your journey, which means you'll get there later. This is possible with certain goals, like retirement (you can always choose to work a few years more). It may be possible somewhat for your kids' education, but you might have to take a loan for the first couple of years.

The other option is to find other paths to get there. The older Bangaloreans might avoid a jam in Viveknagar by taking the smaller roads inside for a bad traffic situation. Or to change the concept completely by driving to Indiranagar (not even on the map above) and then taking a metro train to the MG Road station. In finance, you can do more things:

add more money than the SIP required
change your equity/debt allocation (get a little less conservative)

There is also the option of changing the glide path when core assumptions change. If I find that college costs are actually different or that inflation isn't exactly what I thought it would be, I can change the destination. Glide paths are good starting points but don't have to be rigid and static.

Designing my Goal

I first designed the goal to be a lower-end target. My older son was 12 at the time so I would need money in 6 years. I expected a college to cost ₹ 15 lakh per year, with 5% a year inflation. (This makes sense for most Indian colleges and some European ones but is not sufficient for a full-pay American college)

That would mean a target of about ₹ 60 lakh today, about ₹ 80 lakh in five years if you account for the 5% inflation. (The actual number is about ₹ 78 lakh since you will spend the money over a four year period, rather than all at once)

I started with about 23 lakh allocated to this goal, to begin with. (The money I had was divided into different goals)

I wanted a balanced allocation here, so I chose a 60% equity and 40% debt allocation.

Side note: How do you choose your allocation? It depends on just two factors:

Ability to take risk: Too little time to a goal (less than three years) should reduce your equity allocation to less than 50% and about 10% in the last year. Other issues that influence the ability are your other liabilities (loans etc.) that may be coming due or an income that isn't dependable.
Willingness to take risk: If people cannot stomach the risk of equities, which can easily fall by 50%, they should choose a lower equity allocation.

You could look at the Capitalmind articles on allocating between debt, equity and other classes (Part 1 and Part 2) to get an idea of all the options. I chose 60-40 as a starting point - I can always change it anytime I like.

A simple calculation – aided by the Capitalmind Plan tool – told me I needed ₹ 27,500 per month to reach this goal.

Increasing SIP every year

The calculation assumes that I could increase my SIP every year by the same inflation rate (5%), which means my SIP would increase to ₹ 35,100 in the sixth year. An increasing SIP – easily possible in today’s world as incomes go up with inflation – is a better way to plan your long term goals.

Certain assumptions were aggressive to start with, but I kept it simple. The assumptions:

Equity would return 15% in the long term (yes, aggressive indeed)
Debt would give 8% forever (which was also a little bit of a stretch, but that was what existing yields were doing)
I ignored tax in this equation

This plan is detailed in this link:

The Strategy to Get To The Goal

The Capitalmind PMS Plan tool set up a “glide path”. It's something like this:

(This is set up for the whole six years)

Executing the plan

For Equity, I chose the “Market Index” portfolio – our passive portfolio is roughly 2/3^rd India's top 100 stocks and 1/3^rd the US Nasdaq 100 through ETFs. It's boring but remarkably easy to understand.

For debt, we had a simple debt portfolio investing in many debt funds, and all I wanted from it was no defaults. The expectation was a blended return of 12.2% per year over the longer term.

The strategy was:

Invest every month
Make up for any market falls by adding more if required
Make changes if the life goals change or any other parameters (inflation, cost etc.) need to be modified.

I would be required to add my SIP every month, but I wouldn’t obviously follow the glide path exactly. Markets will fluctuate! Markets will not give you returns in a straight line. What happened in the first few months?

The first few months: Excitement and changes

Every first date of the month, I was required to put in a SIP. The first month – May 2019 – I put in more than expected because I had some liquidity available. I added ₹ 50,000 instead of the required ₹ 27,500. That's also because the markets dipped in mid-May 2019. And I saw myself way behind - let's call it a "deficit", so I added more than required.

Every month, if the markets didn't do the 15% equity/8% debt as required on an annualized basis, I would end up with a "deficit," i.e. below my target.

The glide path continued to increase my targets each month. In June, July and August (2019), I added a little bit of money, but I was still at a big deficit from the glide path! I needed money for a few other things, so I didn't invest until October.

In October, there was still a big deficit. I added a larger sum than my SIP.

I even modified my plan a little. This change was a small one experimenting with a lower college fee number, which slowed down my SIP. The markets rallied and I was suddenly in a surplus again.

(Click for a larger pic)

How it worked in 2020: Covid and all that

In 2020, there was Covid. The fall in the market showed a huge deficit. There was nothing I could do - so all I did was add more when I could, even higher than the SIP where possible.

Every month, I'd look at the "deficit" and see if I could bridge it with a higher investment. If I could, I would.

I'd crossed some tax barriers on certain other investments in late 2019, so I added a large amount to this goal in January 2020. And then, we saw the big Covid dip.

The plan was on track, and I was way ahead of where I should have been. The Covid fall meant that the equity portfolio fell over 35%, which took the plan into a huge deficit. I couldn't bridge it, but whatever extra I had saved for travel and holidays, I added to this goal.

Later after June, when the markets turned back up with a vengeance, I stepped off the gas. I took the holiday I wanted and didn't add too much cash (all of it was bunched). By the end of 2020, the goal was very comfortable.

(Click for larger image)

Three Years of Execution: A Surplus!

In 2021, I decided to get aggressive and upped the plan to include:

higher college fees (₹25 lakh per year)
lower return expectations from debt (7%)
lower return expectations from equity (12%)
Increased equity to 75% in the goal plan

I did this over phases, and my SIP increased to cross ₹ 50,000 per month.

Eventually, the SIP required has reached over ₹ 96,000 per month! (As recently as Feb 2022) This is a little extreme, but it's still achievable.

(Click for a larger image)

The numbers: Ahead, but not by adding more money

The SIPs, as planned (and changed over time), were increased by inflation. So:

The total of all SIPs required added up: ₹ 14.83 lakh
Actual money added in three years: ₹ 14.78 lakh

So despite being all erratic, I added roughly what was required.

The portfolio should have been: ₹ 51.1 lakh (according to the plan)
Actual portfolio value: ₹ 53.7 lakh
This is a surplus of ₹ 2.6 lakh

If I invested only what I had planned, how come I was so far ahead with a surplus?

Remember, we expected only 12.2% (blended) in the portfolio? The actual rate of return achieved was over 15%. The difference is now a surplus.

This is a buffer. If I can't provide a month or two of a SIP for any reason, the surplus will carry me through.

Lessons Learnt

While Capitalmind runs the PMS, I kept this goal plan going for a specific reason: How does it help me plan?

I started with a conservative goal and slowly changed the goal plan over time. I learned the first lesson: Plans do not have to be static. You start somewhere. Then you change things based on data. You can increase your SIPs or decrease them based on your inputs. The SIPs should be in your comfort zone, i.e. you should have enough savings to make them happen.

Second, you don't have to actually invest every month, but it helps. Knowing that you're ahead of your goals is useful because it provides a sense of comfort and a buffer for the future. If you're behind and have a deficit, it pushes you to say you better get things together soon. If it looks too bleak, you might change some assumptions and relieve some pressure. But a regular investment means you may be able to invest more when the markets are down to reduce that deficit.

Third, there is something to be said for the peace of mind this process provided me. A number like ₹ One cr. may be daunting, but knowing that about ₹ 30K to 40K per month, over six years increasing with inflation, with a starting capital of 25 lakh, will still get you there - that helps. And then, every month, you don't have to worry that you aren't there yet; see if you are too far away from the glide path and try to fix it if you are.

Finally, the concept of goal planning and execution isn't difficult. Instead of doing a "blind" SIP every month, where you may not know how much is enough, you can build a plan and reach a target. I personally have plans for the kids, for my retirement and for certain other specific things I want to do (including charity!). It's easier to execute when I know which goal is ahead and behind.

Can anyone do this?

If you're still here, of course, you can.

It's not complicated. The underlying math is a little convoluted, but if you use the Capitalmind Plan tool (click here), you can build a rudimentary glide path and then track it every month.

We have built more tech inside the Capitalmind Wealth PMS to help in the execution and tracking process, which has been helpful. The section below will help you with more details if you like.

The "Market Index" performance

I showed you how I did with the goal. But what did the actual underlying investment do? Here's the equity part - the Market Index portfolio as an overall return post fees. It gave an absolute return of 62% in three years, which translates to 17.4% annualized.

This has beaten the Nifty marginally, but that's not the goal. The goal is to get the Nifty's returns or a more diversified return in equity.

The debt portion has returned about 5.5% or so. That is now about 25% of the goal's allocation.

How does this make for a near 16% Internal Rate of Return? That is because your XIRR will be dependent on the timing of cash flows. I got some timing right (buying more on the dips). Please read our article on the difference between XIRR and CAGR.

Of course, past performance can't be a template for the future, so I won't be tempted to use a higher return for any plans. Don't go beyond 12% for a growth estimate in equity in any planned goal.

Isn't there something "better" than the market index?

The last three years have been incredibly good for markets. The last three years of returns have been even better for our other options.

Put another way; I'd have been even more ahead if I'd chosen one of the other strategies. (I have chosen them for other goals, which are doing brilliantly as well)

You might choose a mutual fund, but you'd have to regularly do the debt/equity allocation and manage the glide path. It's not rocket science, of course.

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