The Best gift for our Children

We all want to give best of the world to our kids. It stars with toys and small things and goes on for their bigger items like laptops, gaming console, bike and car and so on. But as well all know that these items become redundant/ outdated shortly there market value also goes down significantly and needs to be replaced with new version of the items. So what can we give to our kids which does not get outdated and they can use it when they really need it and best of it that its value keep will still keep on growing?

Before getting into the details of that lets understand another perspective of our working life.

There are basically two type of work; either we work for our self which is called as business/ entrepreneurship or we work for others which is called as job or employment.

1. So what is the difference between a Business Person/Entrepreneur and an Employee?

The basic difference is the opportunity business person/entrepreneur can offer for the next generation.

Let us understand it more…

An employee starts his journey at a junior level and works his way up to a senior position and then retires at 55 to 60 yrs.

An Entrepreneur also start his journey from zero and with a lot of struggle and efforts grows his way up. However he has a choice whether to retire or not till health permits.  

As we can see that both of them have worked hard but the entrepreneur has created assets that will continue to generate income even in his old age and more importantly, he has created a strong base for the next generation to take over and make it bigger. The kids of the entrepreneur will not have to struggle like his father and don’t need to start from zero but from where their father left and can make it grow more.  But the next generation of an employee will have to start again from the scratch as his father did and will have to go through all the struggle before they can attain financial freedom.

2. What is the main worry for an employee?

As we can understand one of the biggest worry for an employee is retirement. While we should plan our retirement/financial freedom, we can also gift this financial freedom to our next generation as well so that they will not have to worry about retirement planning and can live life to the fullest.

That is why it is important for all of us to create assets that could generate passive income even while we are not working. Passive income is like interest income, dividends from stocks/mutual funds, rent from commercial or residential property, Royalty etc. which can then be passed on to the next generation.

3. So how can we gift the financial freedom to our kids?

Here is one simple way to do it…

For example if our monthly expense is 50-75k today and we had a corpus of Rs. 1.5 cr. in a balanced fund which can give 10-12% annual return, Then we can withdraw 50-75K per month allowing our principle of 1 cr to grow at 5-6% annually. So, it’s safe to assume that a 1.5 cr corpus today can take care of our financial needs and can get us financial freedom.

Let’s assume our child who is 10 years old now has 45-50 yrs before he/she retires. If we assume an inflation of 7-8%, considering a benchmark of 1.5 cr retirement fund today, the retirement fund needed for your child will be approx. 20 Cr.

So that’s our goal. If we can plan for this now…our children will not have to go through the worry and struggle of retirement planning. Imagine if our parents had done this for us…wouldn’t our life be a little different? And it’s not the Will, it is the knowledge and opportunity…which they didn’t have…but now we have it and we can utilise it for best of our use…

4. How to create such a huge corpus?

 
An 8.5 lakh invested with a fund which can generate a 13% annual returns… will become 20 Cr in 45 years. Now…if we don’t have 8.5 lakhs, there is another way out…Let’s start a monthly SIP of 10000 for 5 yrs and then leave that amount for 45 yrs…we will have our 20 Cr by that time.

Yes, It’s that simple….we just need to spare 10K/month for 5 yrs and it would have taken care of our child’s retirement…they will not have to worry about it in their life time. If we teach them to do the same, our future generations will remember us for a long time even after we are gone….

This could be one of the best gifts that we can give to our child.

Financial freedom actually means the freedom to do things we want to, its gives us the freedom to work for our self, travel the world, spend more time with family, do things that we love etc … It is something beyond the worries of earning and preserving money, and yes we can achieve it  easily with some smart and early planning.

Mutual Funds are not just Right, they are Better also

There are various options available for investments but why mutual funds stands out as compared to insurance products, let's understand it in more detail.

1. Mutual Funds are not an insurance but an investment product. Here our money is invested in market securities so that we get a better and inflation hedged returns which can meet our future financial requirements/goals.

2. Insurance means if something happens to the policy holder then his family/nominee will get a pre-defined lum-sum money. Although no one can fill the gap of that person emotionally however this money helps the family members to get financial support.

3. In Insurance only the cover amount is fixed not the bonus amount. Bonus is declared every year based on the company’s returns like in case of mutual funds.

4. In Insurance to cover your risk tem insurance products can be taken, where the premium amount is much less as compared to normal insurance policies.

5. For example if a 30 Year old person wants one crore coverage. Then if he takes normal policy of Jeevan Anand (with 35 years coverage) then he has to pay a premium of ₹2,99,434 (₹2,86,540 premium +₹12,894 tax). The same one crore coverage can be taken by LIC’s term insurance policy Jeevan Amulya where the premium will be only ₹32,096 (₹27,200 premium+ ₹4,896 tax). Please also note that in case of Jeevan Anand, policy holder has to pay a tax of ₹12,894 every year in which he did not gets any returns.

6. In mutual funds there is no tax at the time of investments and your whole money is invested in the scheme without any deduction. Whereas in case of Insurance approx. 4-5% of total premium goes to tax. Yes it is 4-5% of the total premium in which you do not get any returns. Since your investment amount is reduced so only because of this reason the total returns on investments comes down by 4-5% (actually it will be much more but for simple calculation let’s assume that only).

7. However no Insurance agent tells about term insurance, why? Because in term insurance schemes the commission to agents is very low which makes it unattractive from selling point of view. And the argument given is “You don’t get any return on term insurance”. Do you get any returns in Mediclaim policy or car insurance if there is no claim? then why do we need returns in life insurance? If we take term insurance and invest the remaining amount in a good return products then we can get multiple time returns as compared to normal insurance products. As well as our life is also covered by right product.

8. For example as mentioned in point no. 5, if we take term insurance instead of Jeevan Anand and invest the remaining amount ₹ 2,67,338  in a mutual fund with expected 10% P.a. then we can get almost ₹ 7.97 crores in 35 years.  And remember this money is additional to the insurance cover of one crore.

9. It is said that mutual funds invest in share market where your all money can be wiped out. Let’s understand this more.

(i) First thing mutual funds also invest in bond/debt market. In fact almost 60% of total mutual fund money is invested in Debt market, yes this is the same market where LIC also invests.

(ii) Secondly mutual funds have various different type of schemes wherein a person can invest for a week to a year or 5-10-20-30 years.

(iii) Mutual funds have schemes which invest only in bond/debt market and not a single penny is invested in equity shares. A person can invest in different schemes based on his/her financial goals, risk appetite and investment horizon.

(iv) There is no binding for investment in mutual funds, if due to some reason someone wants to stop the investments it is possible without any penalty whereas in case of insurance if we stop the policy in between it can lapse or forfeit.

(v) In mutual funds you can start investments with as low as ₹500.

(vi) In mutual funds you can increase, decrease the amount any time. You can stop the investment and also can restart as per your convenience.  All these facilities are not available in Insurance.

(vii) Share market goes ups and downs, it is volatile and this is the fact, but if we invest our money for long term like we do in insurance then chances of losses are very rare.

(viii) Share market is a reflector of the country’s economy. If economy is growing and getting stronger then share market also goes up. For example in 1979 BSE Sensex was 100 points which is today at 33000+. This is true that it goes down in between but it also comes back from its lows and goes up again.  Like our incomes is growing similarly as the companies make more profits then there share prices also goes up.

10. Mutual fund companies provides all details where the investor’s money is invested, Insurance Company’s do not provide these details.

11. All the portfolio details of each and every schemes of mutual funds are provided at the website of the company on monthly basis as well as other websites also. Whereas Insurance Company do not provide any details where they have invested the money this itself shows who is more transparent and honest.

12. “Mutual Funds are subject to Market Risk” this warning is given by mutual funds so that if a person is investing he/she should be aware about the risks involved and invest only after having full information. Mutual funds give back all returns (after deducting expenses) and do not keep a single penny with themselves. Insurance company do declare bonuses but it is discretionary and not necessary that they pass on all the profits.

13. The NAV (Net Asset Value) of mutual funds are declared everyday which is not the case for insurance; therefore Funds Mangers have to very actively manage and perform in case of mutual funds this is also one reason that their returns are better as compared to Insurance products.

14. Fund Manager of Mutual funds knows that if I do not perform then investor can take out his money whereas in insurance company they knows that once the investor has taken a policy he will most probably continue as otherwise it will get lapsed/forfeited therefore they do not have pressure to outperform. This is also a reason that most of the mutual funds do better than insurance products.

15. Insurance companies are legally bound to pay the insurance cover amount only. How much bonus is to be paid depends on performance of their investments and surplus money which is not guaranteed. And as mentioned at point no. 5 for life cover we can take term insurance then why should we buy normal insurance product by paying 9.5 times more for the same guaranteed amount?

16. In mutual funds there is very small commission as compared to insurance products.

17. Insurance products are generally sold by creating fear (what will happen to your family if you are not there) and emotional blackmail which is a negative marketing. Mutual funds are sold to meet your future financial plans/goals when you and your family both will be there and can enjoy the money which is a positive marketing.

TAKE INSURANCE FOR LIFE COVER AND INVEST IN MUTUAL FUNDS TO MEET YOUR FUTURE GOALS