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.
(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.
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.
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