How should we save money for our Kid’s future

Most of us, the moment we become parent, start thinking of the future of our child “ Mera Beta (Beti) bada hokar mera naam karega “ is a famous Indian saying.

To make his future bright we do everything so as to give him the best education and organize a stylish wedding and for all this we need money in fact lot of money. Here comes various things in mind; how to build the corpus for these expenses, some of them are:

1. Which instruments are suitable for my requirements?

2. Will these help me to build an adequate corpus for my all goals?

3. Are ULIPS/Child Insurance Plan are right investment option for future goals, or should we take PPF or Sukanya Samriddhi Yojana for my daughter?

4. What about real estate? Is this a good deal, or Gold is better option?

5. Or should I simply put all my money in fixed deposits?

Most of the time people keep on randomly putting their money in various options due to ignorance and/or wrong advice without understanding the long term implications of the same. The common mistakes people do while investing are:

1. Thinking too much about safety then return

2. Inconsistent Investments

3. Not starting early

4. Ignoring their own health

5. Not taking proper life insurance

These mistakes results to in-adequate corpus to fulfil child’s ambitions or then digging out the retirement corpus to compensate the same.

So what is the right way to create sufficient corpus for the child’s future and how should we go for it. Let’s understand this.

1.  Firstly we should know how much amount in current value is required based on his/our ambitions.

2. We need to calculate the future value of the corpus based on the time horizon

3. Based on time horizon we need to decide the right asset allocation for the investments. i.e. how much amount or percentage should be invested in debt, equity, gold, real estate etc.

4. Based on asset allocation we need to decide about the instruments i.e. which company’s equity? Should we invest direct equity or through mutual funds, In debt whether FD or PPF or Sukanaya Samridhi or Debt Funds or Balanced Funds, In Gold should we take physical gold or ETFs? In Real Estate residential or Commercial, and in which City? Etc..

Now let us find out the answers of some of the common questions.

(a) What is the right options for investments?

Mutual Funds could be one of the best option for regular investments through auto pilot mode. We need to construct an optimum portfolio with right mixture of equity and debt based on investors risk appetite and time horizon. For a long-term goal, it is better to have investments inclined towards equity, whereas for short-term goals, have more exposure to debt. Once the scheme/portfolio is finalised we can let the money keep on investing in those funds on regular basis through SIP route. For more details read my previous post the link of which is given below.

 Mutual Funds are not just Right, they are Better also

(b) PPF, FDs, Sukanya Samridhi Yojana (SSY) are Safe and Secure, So should we go for it?

These are debt products which are relatively safe and can be invested if our time horizon and risk appetite demands so. However we should remember that although PPF and SSY but there interest rates also changes every quarter based on the current interest rate scenario and we should not expect very high returns from them. Further PPF is 15 year instrument and SSY is also 10-15 years instrument so we should also keep in mind the future requirements.

(c) What about ULIPS or Child Insurance Plans, how good are they ?

Investment and Insurance are two other things and we should not mix them. All the Child insurance normal endowment plans gives 5-7% returns, while ULIPS are equity debt mix and give market return less of various expenses i.e. morality charges policy admin charges etc. and there will also be GST on the premium amount. We should always remember that It’s not the children who need insurance, but parents. A prudent option is to go for a combination of a term cover and mutual fund investment. For further details read my previous posts Mutual Fund Term Insurance: Best of Both Worlds .

(d) What about Real Estate, is this good investment option?

For last several years real estate has given almost negligible return. Apart from that it is kind of illiquid investment which cannot be sold in short notice in case of urgent The rental yields are 3-5% which are very low and unattractive. Besides, there are various other charges that we need to pay like property tax, maintenance cost, high transactional costs, or capital gains when you sell it. Further a property is not divisible and we cannot sell one room in a flat or a house to meet an immediate expense.”

All those issues makes real estate an un-attractive investment option.

(e) Is Gold better to invest for long term?

Normally we all Indians need gold for our Child’s wedding, but buying physical gold has its own draw backs. One is if we buy gold jewellery it may be outdated by the time our child marries or he/she may not like it. Secondly there are storage expenses and purity issues. 

So what could be the better option to buy gold? The answer is Either ETFs or Sovereign Gold Bonds, further as Sovereign Gold bonds gives interest of 2.5% besides paying back the market price of gold at the time of maturity so this could be better option if we need to buy gold in future.

(f) Should we take Education Loan or dig out form my Retirement Corpus to fund my Child’s Education?

Taking education loan is better option due to following reasons,

·        This keeps our Retirement Corpus safe,

·        Our Cash flow from existing corpus remains intact

·        By taking Education Loan we create sense of discipline and responsibility in the child that he should be sincere on his studies and take up the repayment responsibility

·     Education loans are easily available for good course, both for Indian and foreign higher education.

·      The interest rates start at a low 8-10% and no guarantor or collateral is required for loans below ₹4 lakh.

·        Education Loan has tax benefit also as the entire interest portion of the loan is eligible for deduction under Section 80E of the Income Tax Act.

·        There is grace period of one year, as mandated by the RBI, after the child finishes his education and starts repaying the loan. Hence child will have sufficient time to start repaying the loan

For further details read my post, the link of which is provided below.

Education Loan: An option to enrich your skills even if you can’t afford it right now

As we can see from above points it’s better to take loan rather than digging out from retirement corpus.

Nothing is impossible in this world, If we plan it properly and timely we can achieve great goals and dreams for our kids in a very easy and simple way.

DIWALI- An Ancient occasion to enlighten your Money Management

Diwali is a very old festival which is celebrated on the return of Lord Ram to Ayodhya after fourteen years of exile. Diwali is celebrated on a new-moon day and the lightening of lamps indicates the destruction of darkness and evil. For all Indians Diwali is one of the most popular Indian festivals which is celebrated with lot of pomp and splendour. “Lakshmi” The Goddess of Wealth is worshiped on this festival. It is an important occasion for many reasons like the importance of human bonding, celebrations in family, reunions of friends and relatives, etc.

This is an occasion not only for a traditional reason, but also for its significance to organise all the financial information. This tradition is equally significant for the business as well as many business starts new account books on this day, in Stock exchange also there is Muhurat Trading, a special occasion for the stock markets.

The Diwali festival also gives us a great learning about money which we have tried to discuss as below:

1. Dhanteras: Bringing home the “Wealth” –

The first day of Diwali, Dhanteras (“Dhan” meaning wealth and “Teras” meaning the “thirteenth day”) falls two days before Diwali. The day pays homage to Lord Dhanwantari who is associated with Ayurveda and various healing practices for the good of mankind. This day marks the day to make new purchases and investments and can also be referred as start of financial wellbeing. This day is considered to bring good luck and prosperity to the family. The popular belief is that any investment made on this day will grow and multiply throughout the year. It is the day chosen by most people to make investments in gold, silver, platinum or any other metal.  Regularly investing in precious metals, every year during this special day also helps you in growing and accumulating wealth over a long period. Off late, stepping aside from the traditional definition of investing in physical metal, it is seen that many investors also invest in gold ETFs, or financial instruments which is akin to investing in physical gold. It teaches us that “we should keep on accumulating wealth regularly to achieve financial wellness.”

2. Narak Chaudas: To Clean the “Mess” -  

The significance of this day is grounded in the story of Lord Krishna's overwhelming triumph over a ferocious demon named 'Narakasur', who kidnapped the 'gopis' This is the second day of Diwali wherein every one cleans up their home/work place and remove all the unnecessary things.

Similarly we should also check our portfolio thoroughly to ensure that it is aligned with our financial goals along with unforeseen/emergency expenses and also remove those investments which are no longer required. It teaches us that “we should identify and eliminate the financial mistakes committed in the past” be it availing high cost debt, wrong financial products purchase like endowment, ULIPs, etc.

3. Lakshmi Pujan: Respect the “Money” –

This is the day when Lord Rama finally returned home from exile and was welcomed with a glittering row of lights radiating from every household. It also coincides with the Pandavas' return from the forest. Lakshmi Puja is performed on this day. Lakshmi  is the Goddess of Wealth and her worship shows the respect of wealth and to preserve it in a pious way. This teaches us that “We should do hard work with clean heart to earn so that goddess lakshmi will stay in our home forever.” This day we also play with firecrackers and exchange sweets and presents which shows to celebrate happiness and share the joy of wealth with others. However we need to be careful and should not indulge into show offs which could be very dangerous.

4. Govardhan Puja or Padva: Nothing is “Impossible”-

The fourth day is Govardhan Puja or Padva. It is the day when Lord Krishna defeated Indra by lifting the huge Govardhan Mountain. This teaches us “that we can achieve everything if we believe in our self and put hard work.” This is also New Year for many communities in India and symbolises a new start by overcoming past mistakes. We can start a new financial plan and make new commitments to ourselves so as to come out of our old perils and achieve new success in life.

5. Bhai Dooj : To share with our “Loving Ones”-

The fifth and last day is Bhai Dooj. On this day sisters invite their brothers for a lavish meal and perform a ‘tilak’ ceremony. Sisters pray for their brother’s long and happy life while the brothers give gifts to their sisters. This teaches us that “we should share the things with our loved ones” like employers giving bonus/ESOPs to employees and employees promise to work hard to make their company more successful. Bhai dooj occasion teaches us that everyone has a role to play and if all of us do our duties with sincerity great success can be achieved easily.

Diwali is celebrated on a new-moon day and the lightening of lamps indicates the destruction of darkness and evil. Everybody aspires for a good time, and spending for the same is human. However we should remember that celebrating a festival or an occasion should never be a onetime affair but should be done every year. Meaning although spending now can add to the celebration, it may adversely impact the saving potential thereby resulting in weak financial planning habits which in turn may compromise the financial goals in the future.

The best financial practice on this front is to allocate a budget for non-committed or discretionary expenses such as a festival, occasion or a celebration every month/year and comply by the budget. Strict adherence to the budget negates the possibility of overspending thereby enhancing surplus which in turn leads to a higher likelihood of celebrating these occasions regularly and not just one time.