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Everyone has a dream about their childrenís future and education. But the way the cost of education is spiraling, steps must be taken to ensure that this does not just end up in a dream. B Srinivasan lists.
Some of the fundamental requirements to build up a good corpus for your childís future include chalking out a goal with a clear time frame and corpus requirement, making regular and systematic contribution, being clear about the returns expected in each of the instrument and the tax implications over a long period for each of the instrument selected.
Considering all the above, the various instruments that can be looked at in the current circumstances are:
Ideal Mix: Traditional Insurance plans: 30% Unit Linked plans: 15%Children mutual funds: 20%Diversified equity funds: (in the name of children) 10%Direct equity: 15%Commodities: 10%
Traditional Insurance plans: 30%
Unit Linked plans: 15%Children mutual funds: 20%Diversified equity funds:
(in the name of children) 10%Direct equity: 15%Commodities: 10%
∑ The claims are made out to the children and not to the parents.
∑ They provide for disciplined and committed payment of premiums throughout the policy period.
∑ There are no liquidity points like loans against policies etc., which ensures the corpus saved cannot be diverted for any other cause.
∑ The maturity claims are made only at the predetermined periods, thus ensuring a guaranteed receipt of the money when they are really needed.
∑ The payouts/maturities can be worked out at the beginning only as per the need.
∑ Finally, because of the risk cover provided under these policies, they ensure with or without the policyholder, the goal will definitely be achieved.
UNIT LINKED INSURANCE PLANS: The basic, traditional children plans usually work as an alternative for the bank deposits etc. where as unit linked insurance plans can be used as a double advantageous plans where the risk is also covered and the investment decisions will remain in the hands of the investor and thus can generate much better returns. Advantages of ULIPs when compared with traditional policies include:
∑ In addition to the necessary risk cover, they also ensure that investments can be channeled into high growth options.
∑ Provides enough flexibility in the withdrawal of funds.
∑ Some of the current schemes, in addition to the risk cover of sum assured also protect the future income generation potential also.
MUTUAL FUNDS: There are enough mutual fund schemes are available in the market to meet each and every need of an individual with a various risk appetites. One should carefully choose a basket of schemes, which should be a combination of debt and equity investments. There are designated children mutual fund schemes are available, which can be combined with good diversified equity funds, which together can provide a much better growth opportunities in the long run. One can also use Systematic Investment options available with all the mutual funds, which also saves the entry cost. Even though there is no uniqueness in dedicated children plans, they still provide the following advantages:
∑ Separate identification of savings towards children.
∑ Some dedicated children schemes are less expensive than the general ones.
∑ There will also be a general psychological deterrent Ė to use children funds for other causes.
∑ There exists a tremendous tax advantage: Since mutual funds are taxed only on maturity and these funds when matured directly goes to the Major children, the same will not be coupled with the parents income.
DIRECT EQUITY: It is an option used by knowledgeable investors. The operation and investment styles are Ė one can open a demat account in the name of child itself and keep on investing and accumulating good quality stocks with long-term track record and with a very good growth opportunities in smaller quantities over a period of time. But one has to be very careful in this and should not get carried away by the momentum of the equity markets.
Quick tips: -Ensure a good asset spread, which provides adequate safety and growth -For a medium risk person, a spread of 40:60 or 60:40 in debt to equity is acceptable -Maintain a good mix of liquidity & flexibility -Keep away from instruments whose returns will be subject to tax incidence on an accrual basis
-Ensure a good asset spread, which provides adequate safety and growth
-For a medium risk person, a spread of 40:60 or 60:40 in debt to equity is acceptable
-Maintain a good mix of liquidity & flexibility
-Keep away from instruments whose returns will be subject to tax incidence on an accrual basis
COMMODITIES: This is traditionally followed in India, especially where there are girl children, to keep on investing in commodities like Gold and Silver etc. In the present situation, where commodities might be growing at a better rate and also to beat the inflation, this is a good strategy. But the factors to remember are that there should not be any conversion costs Ė like when one invests in gold, they should invest in Gold Biscuits and coins and not in ornaments.
There were a lot of problems in direct investments into commodities so far. But all these are getting addressed and will be removed in future. For ex. Today 24 carat Gold coins are available in plenty, that too starting from 1 or 2 gram size. And also in the future, with the commodity-based funds coming into existence in the near future, oneís investment choices will be very easy.
However success to any financial plan always depends on oneís ability to adopt stringent financial discipline.
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