May 04, 2012, 12.45 PM IST
When an investment advisor or your private banker talks to you about your child�s future, what enters your mind?
When an investment advisor or your private banker talks to you about your child's future, what enters your mind?
Most likely, somebody has talked to you about buying an insurance policy by policy that matures around the estimated time of your child's education or marriage. This is a very bad idea.
Investments are a means to an end. We want our investments to do well so we can utilize the funds towards our personal goals. For example, you might be married with two children. This means you would be thinking about their school fees, college fees and marriage expenses which you have to meet. You also want to plan for your own goals such as a family holiday every year or two, a new car every 5 to 7 years and of course your own retirement . But to build these funds in order to meet your goals, you have to make the right investments.
Insurance is meant for protection. The core role that insurance plays in your life is to protect you and your family from medical expenses (via mediclaim, personal accident insurance and critical illness policies) and to protect your loved ones from financial trouble in your absence (via a Term Plan). You can use our Human Life Value calculator to see how much term insurance you need. In today's scenario, that is it. Insurance and investments should be like oil and water. They don't mix.
So when you think about building funds for your children's goals, if not through insurance, then how?
Let's take a simple example to show you how it's done.
Our favourite fictional character Mr. Shah has two children, a son aged 9 and a daughter aged 12.
So his son will require his college fees in 9 years and his daughter in 6 years.
Son's Education Goal
To achieve this goal, Mr. Shah needs to invest Rs. 12,225 per month into an investment yielding 12% per annum.
Daughter's Education Goal
To achieve this goal, Mr. Shah needs to invest Rs. 9,184 per month into an investment yielding 12% per annum.
Time In the Market
A wise man once said 'it's not timing the market that matters, its time IN the market.'
Investing is like fine wine. The more time you give it, the better it gets. In order to achieve both his children's education goals, it is advisable for Mr. Shah to invest in a combination of equity and debt mutual funds . For a goal that is at least 5 to 10 years away, you have more flexibility and opportunity to grow your wealth. For a shorter tenure goal, it is advisable to opt for a higher exposure to debt funds and a lower exposure to equity funds.
De-risking Your Portfolio
It's important to de-risk the portfolio when there are a few years left remaining for the goal. So for example, when the goal is 3 years away, start shifting the equity investments to debt via a Systematic Transfer Plan. The investments made in the last 3 years can be done into debt i.e. high yielding FDs, FMPs, and safe debt mutual funds, with a part of the corpus in liquid plus funds for quick liquidity.
Other Key Points to Keep in Mind
1. The figures given above are an example only. Do a little research to find out what exact fees are (in today's terms) for the courses you think your children might want to pursue, and how these fees have grown over the years. The more precise your information is, the better you will be able to extrapolate the details and make a guess about forthcoming inflation.
2. If your child is quite young, you can consider investing in mutual funds in combination with PPF if you are risk-averse. But keep in mind the 15 year PPF lock in period. Withdrawals however are possible after a few years. Access our PPF calculator to see how your PPF can help fund your child's education. You can also read our article Intricate Details About Your PPF Account .
3. If you have children who are very near their education or marriage goals, stay away from equity. Opt for fixed income options i.e. debt mutual funds or FDs. Keep the taxation in mind. An FD will be taxed as per your tax bracket, a debt mutual fund is taxed at 10% without indexation or 20% with indexation over the long term i.e. more than 1 year. (Read our article for 4 Quick and Easy Ways to Save Tax )
For more information on planning for and achieving your financial goals, contact your Financial Planner for a personalized financial plan. Keep in mind the golden investing rule ' the sooner you start and longer you stay, the more wealth you will build.
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