Thursday, June 6, 2013

Planning for your kids future



Now, just casually mention "I WANT TO SAVE FOR MY CHILD'S FUTURE" and you will be flooded with hundreds of calls, emails, messages, etc from Insurance agents and Banks.
And, with info overload, more often than not, investors fall into the "cheapest" bait and then regret in leisure.
So, in a genuine attempt to clear the clutter and confusion, here is an article on the way to go about setting up a Financial Plan for your kid’s future.

Congrats.  So, you have just been blessed with a angel like child and you have already started dreaming making the child a Doctor/Engineer.
You being educated have decided that you will invest in the child's name right now to build a corpus for the same.
Another congratulation since you are on the right track of Financial Planning by choosing to invest for your child at such a young age. This will ensure that the investment to give the Compounding Magic. The biggest aspect in your favour is TIME. You have clear goal and you have sufficient time to achieve the same. Because the earlier you start, the more the time available for your investments to grow, and the bigger the corpus.


BEFORE INVESTING:
It is inevitable that you prepare a road map of future goals for your child wherein you plan when and how much you require for your kid.
Ex : College Admission (15 years)
        Grand Birthday (10 years)
        Marriage (25 years)
This road map will help you and your Advisor to decide on the Asset wherein your investment can go. While arriving at the figure, do factor in the inflation. While calculating the figure, it is better to err on the higher side rather on the lower side. 


WHERE TO INVEST:
          After you prepare a list of your future goals and approx dates, you should decide on your risk tolerance and prepare an ideal Asset Allocation preferably with your Financial Advisor.
Jointly decide on how much percentage should be invested in Mutual Funds, Insurance, FDs, PPF, Gold, Real Estate, etc.  Strike a good balance between capital safety and returns.
It is widely accepted fact that majority of Indian parents blindly look at low yielding PPF and other Fixed income instruments for their children which obviously, due to inflation and taxes, may leave well short of your targeted corpus. With this in mind, you should have a higher exposure to Equity (via mutual funds, preferably) to generate inflation plus returns.



CHILDREN INVESTMENT NO DIFFERENT:

          The basic thing which every Parent has to understand that whether you are investing for yourself or your children, each investment carries the same risks, same returns and even the same tax.  Just because you are investing for your kid does not make the Insurance Company or the Mutual Funds to show any favour in terms of either costs or returns.


FIRST THINGS FIRST:
          The Foundation of a Proper Financial Plan rests on Adequate Life Insurance. You need to take Adequate Term Insurance Plan as Term Plans are very cheap as it is pure risk policy.
Next step is taking a Health Insurance Plan. Take Adequate Health Cover and increase the Cover by topping up in about a decade.
Then invest in Diversified Mutual Funds, which I keep recommending in these columns.

CHILD PLAN:
          Regarding Child Plan, I am not in favour of any Child Plan, be it Mutual Fund or Insurance. They are pure Marketing Gimmick and work in the same way as any other scheme by investing in a mix of equity and debt instruments. There is nothing special here. Avoid child specific investment schemes.
I have observed that 9 out of 10 people blindly go for Child Insurance Plans. This is a waste of money.
Child Insurance Plans are long term gambles similar to ULIPs. The returns depend on how well the Insurance Company manages the Investment portion.
Child Plans also are very expensive because of their charges. In fact, these charges are not just for the 1st year but continue for several years.
Insurance companies bring out these Child Plans to play on your emotions and squeeze money from your pocket. I am against these Child Plans and Pension Plans. While investing, the brochure paints a rosy picture and you are sure to get lured to invest. But, at maturity you will realise that the returns are very poor. It is always better to keep Insurance and Investment separate.

An ideal Child Plan is the one which covers the Parent and not the Child. Insurance is taken to provide financial security in case of death of proposer and hence there is no point in taking Insurance in child's name. You are advised to take Insurance in your name, make your Child Beneficiary nominee under the guardianship of your wife.  Opt for a Plan which has "Waiver of Premium" clause wherein all future premiums are waived off in event of death of parent and most importantly, your child will continue to get all the Benefits promised by the Policy.


Equity Mutual Funds is the only asset class which grows FASTER than your kid’s tuition bills.

No child plan can match the returns of top of even average rated diversified equity fund. In the name of offering you a custom investment cum insurance product they charge high costs with lock in, surrender charges etc.


PPF:
          Yes, as a parent you can invest in PPF for your child. But, do note this will added to your Tax Status and you can claim only a max of Rs.1 lakhs and not Rs.2 lakhs.
PPF is very very safe and almost every advisor worth his name recommends PPF. But, considering that PPF tends to give returns matching with Inflation, I would suggest looking at assets which gives returns above Inflation and that obviously will be Equity Mutual Funds.
But, yes, surely a combo of PPF + term Plan beats any Child Plan any day especially since now PPF is now market linked.
But, on another note, a combo of Mutual Funds + Term Plans beats all other combo!!!

MUTUAL FUNDS:
          You should look at investing regularly in large- and large- and mid-cap funds to get the most of power of compounding and SIP investments. As said earlier, mutual funds are the only asset class which has the potential to deliver above inflation returns on a consistent basis. I strongly suggest you to invest through monthly SIPs to make use of the volatility of the fund's NAV movement.

My model mutual fund portfolio for your kid would be
AXIS TRIPLE ADVANTAGE FUND
BNP PARIBAS DIVIDEND FUND
BIRLA SUNLIFE FRONTLINE EQUITY FUND
DSP BLACK ROCK TOP 100 EQUITY FUND
HDFC PRUDENCE FUND
ICICI PRUDENTIAL DYNAMIC FUND
IDFC PREMIER EQUITY FUND
L&T EQUITY FUND
MIRAE ASSET INDIA OPPORTUNITIES FUND
RELIANCE EQUITY OPPORTUNITIES FUND
RELIGARE INVESCO CONTRA FUND
TATA EQUITY P/E FUND
UTI DIVIDEND YIELD FUND

You can choose any 5-6 funds from the above based on your risk appetite.

If you do not want to go to a financial advisor and invest in 1 single fund, then you can consider investing in ING FINANCIAL PLANNING FUND - AGGRESSIVE. This Fund is a Fund of Fund which invests in Best of Funds across AMCs and has given a good account of itself in its short history.

STICK to the Asset Allocation.
Review your portfolio regularly and take corrective action, if required.
Move your corpus away from equity to Debt as you near the Target Date.

FINALLY,
          Do review progress made by your portfolio regularly and take corrective action if required.
If there are new goals or if present goals have been met, then appropriately increase/decrease your investments and also modify your portfolio accordingly.
 Make sure to monitor the progress of these funds and consider moving to debt funds as you approach the year when you need the investment.

 Stick to the above funds for Good Gains, which should give returns definitely better than ULIPs.
Best of luck,
Srikanth Shankar Matrubai 

Also visit http://goodinsuranceadvisor.blogspot.in/

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