How a single mom with a child can invest Rs 1 Crore and manage financials better?
Life is uncertain. Woman would have remained as single mom either due to death of husband or due to divorce. If such single mom has a child (s), the responsibility would be even more. There is one question from one of our readers asking, how to manage financials better and invest Rs 1 crore received through insurance. In this article we would provide various tips on how a single mom with a child (s) can manage the financials better along with investing Rs 1 crores efficiently.
Question from the Reader
One of the readers of our blog mailed me stating:
“Sir, my husband has passed away few months back. I am single parent with a 2-year child. I got insurance amount of Rs 1 Crore. I want to use this money in better way for me and for my child future. Also, what steps I need to take to ensure I am in control of my financials in future”
Quick summary of the action plan required by single mom
Let me provide a quick snapshot on such single mom can plan it well before going into detailed planning.
1) Cover basic financial planning (life insurance, health insurance and emergency fund etc.)
2) Create financial goals. Without proper goals, whatever they invest might not yield good results.
3) Invest based on the financial goals.
4) If there are immediate basic needs like buying house, they can prioritize. However, in case buying a house is given priority, all other financial goals might lag in case these are not achievable with the balance corpus amount after buying the house.
5) For short term financial goals, go for simple FDs of short-term debt funds. If these are in medium term, go for medium duration debt funds or balanced funds. If the goals are for long term, go for equity funds / index funds. Don’t over complicate the things, keep it simple.
How can a single mom manage financials better?
Here are few tips to have financials under control.
#1 – Cover Basic Financial Planning first
Irrespective whether such single mom has good corpus or not, there are a few basic financial planning to be covered first.
1) List out monthly regular expenses that are required for basic needs like groceries, rent, utility bills etc.
2) Consider a good term insurance plan that has sum assured of at least 20 times of yearly income. In case the single parent is not working, consider 20 times of yearly expenses to start with. E.g., if single parent is not working and monthly expenses are turning to be Rs 40,000 per month / Rs 4.8 Lakhs per annum. Expenses for 20 years would be around Rs 96 Lakhs. Hence considering 1 Crore term insurance plan could be better to start with. This would ensure that even in your absence, money is not a hurdle for your child education and their future.
3) Have adequate health insurance policy that covers self and children for Rs 10 Lakhs with a top up policy of Rs 50 Lakhs to 1 Crore. This step ensures your savings are not eroded when there is emergency hospitalization.
4) Have an emergency fund covering 12 months of expenses. Put this in simple FD which can liquidated within a day. E.g., if monthly expense is at Rs 50,000, an amount of Rs 6 Lakhs can be kept as emergency fund. One can efficiently create and manage the emergency fund. This step ensures that in case you need money urgently, you would not touch your medium to long term investments.
#2 – Create financial goals
Investing random basis would not yield desired results. One should always create financial goals and invest based on the tenure.
Here are few examples on how your financials can get screwed if you don’t invest based on financial goals.
Example -1 – Investing in equity mutual funds for children yearly tuition fees could be disaster if stock market crashes.
Example – 2 – Investing in fixed deposits for 10 or 15 or 20 years would provide low returns compared to other investment options.
Hence, a single mom or single parent can create the financial goals first and invest based on these goals.
#3 – How single mom can invest for short term financial goals?
Short term financial goals could be anywhere between 3 months to 2 years’ time frame. Examples of short-term goals are yearly fees for children, home improvements, buying a car etc.,
Depending on the tenure, one can invest in relevant investment option.
For short term goal of < 1 year, one can go for simple fixed deposit or ultra-short term mutual funds. Such instruments can provide 5% to 7% annualized returns.
For short term goal of 1 to 2 years, one can go for short duration mutual funds. These funds can give better returns than bank fixed deposits (6% to 7%).
While there are plenty of other investment options, no need to experiment for such short period.
#4 – How single parent can invest for medium term financial goals?
Medium term financial goals could be anywhere between 2 years to 5 years tenure. Some examples are like buying a car, down payment for house, paying off high debts (if any) etc.,
Low risk investors who are looking for 5 years tenure, can go for simple FD or National Saving Certificate. Such instruments offer 6% to 7% interest rates.
Medium risk investors can invest in medium duration mutual fund schemes that can fetch 7% to 9% though not guaranteed.
If the time frame is 5 years, one can invest in balanced mutual funds which can fetch 10% to 12% annualized returns though not guaranteed.
#5 – Where a single mom can invest for long term financial goals?
There could be situation where such single mom might have sufficient money now for short term and medium term but looking for long term financial goals like 10+ years. This could be for foreign education for child or buying a dream home or starting a dream business or to create corpus for retirement. Money invested in short term and medium term would not beat inflation. The only way to beat inflation is to invest in equity, however that comes with risk. If you do not want to take risk, simply go for investment options indicated in medium term goals above.
Investors who can take some risk can invest equity funds / index funds.
Many investors do not like index funds. In such case one can go for active funds.
Instead of investing in single fund or single category, one can invest in bundle of mutual fund portfolio that consists of large cap funds, midcap funds, small cap funds, balanced funds and flexicap funds. This way the portfolio is always diversified and returns are maximized. Such portfolio can work like “all seasons” portfolio. Investing in equity funds can fetch 10% to 12% annualized returns.
#6 – How single mom can invest Rs 1 Crore and get monthly income?
Again, this depends on the risk such investor wants to take. I would always recommend two bucket strategies to invest lumpsum and get regular returns.
If they have Rs 1 Crore for lumpsum investment, they can adopt two bucket strategies. i.e., Invest 1/3rd for < 7 years and 2/3rd for 7+ years (Rs 33 Lakhs and Rs 67 lakhs)
1) < 7 years – Rs 33 Lakhs – Invest this corpus in short term debt funds and balanced funds. One can get approx. Rs 51,500 per month (pretax) through this bucket. They can invest in FD + debt funds / balanced funds that can fetch 7% annualized returns. This Rs 33 Lakhs would be almost zero at the end of 7 years as the entire amount would get withdrawn (capital and returns). If any amount left out can be shifted to main corpus.
2) 7+ years – Rs 67 lakhs – One can invest this in equity mutual funds that can fetch 10% to 12% annualized returns. Investors should not worry about short term fluctuations in stock markets. At the end of the 7 years, this corpus would get doubled i.e., Rs 67 lakhs would move to approx. Rs 1.35 Crores.
3) Repeat step-1 and 2 every 7 years. This process would help to get increased monthly income + corpus would get doubled every 7 years. This strategy also ensures that your corpus is not eroded and always on upside.
I am not saying the above are only the best options. The above are few examples on how one can create a small plan and invest money based on their risk appetite and how long they want to invest.
Have you liked our tips and analysis? Then share it on your Facebook, Twitter, Telegram and other social media which might be useful to your friends too.
My suggestion for 1Cr to single mom with one 2 yr old baby would be as below :
Presuming monthly expenses of 50k, Deposit 3Yrs (20L)expenses in Savings cum Term Deposit account for regular expenses and insurance expenses and EMERGENCY fund.
Invest 80L as elow :
Do SIP 25k in two Bal adv funds for 3 years and then do SWP for next 3 years to meet regular needs beyond 3years.(Mychoice :HDFC Bal adv and Edelweiss Bal Adv).
Do SIP 50k in one Hybrid agressive Fund ( ICICIPru or Kotak) for 6years and do SWP thereafter.
Remaining amount should be put in 2 ELSS funds thru SIP (Quant and Axis) for 12 years and then do SWP on need basis or withdraw lumsum.
Please advise on the best mutual funds for 2022.
Large + Mid Cap
Thank you in advance.
Hello Dilip, Pls wait till 1st week of Jan,2022 wherein our latest post covers them
Thank you Suresh. Will wait for the latest list of SIP. Thanks
Thank you Sikander
Having adequate insurance coverage is the best way to make sure that you are prepared for every kind of eventuality.