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Apr 06, 2009, 03.29 PM IST
The initial celebrations on the arrival of a child gradually leads to a sober reflection on how best to ensure his / her comfortable upbringing and education. Investment advisor Ramganesh Iyer addresses the finance aspect of this concern.
Investment is distinct from Savings
‘India’ is the best growth story to invest in
Returns on investments exhibit the effect of compounding. Very simply put, it means that the returns earned on the investment in the first year, gets added to the corpus in subsequent years and fetches its own returns. Thus, in the illustrative returns shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would only be Rs 2 crore in 10 years time.
Once you are more comfortable with equity markets and with how an investment portfolio works, you can consider allocating funds to more actively managed portfolios as well. These require much more research and active management, but at the same time have the potential to generate higher returns than the index by leveraging existing market conditions.
The concept of life insurance is to secure the lifestyle and indeed the financial well being of the family in the unfortunate event of the breadwinner not being around. Due to cultural reasons, this often brings unpleasant thoughts, and hence the subject of insurance gets pushed under the carpet.
However, we would rather look at it as a means to lead a more secure and worry-free life. While the emotional trauma of loss of a family member is unavoidable, insurance atleast spares the financial burden that this could bring. Thus, an insurance of five to seven times annual earnings is a useful benchmark to have as amount of life insurance.
A term plan is a simple and effective life insurance policy. Very roughly, the annual premium for a healthy 35-year old, for a life cover of Rs. 1 crore, should amount to about Rs. 45,000. There are two important points to note here: the earlier you start the life cover, the lower the premium rate you can lock-in (once locked-in, the premium does not ever change). Secondly, it is a huge benefit to start life insurance when one is healthy and unaffected by any chronic ailments. This ensures much lower premiums, and a hassle-free claims process.
We would, at this stage, advise against the more complicated unit linked products; or the typically low yielding ‘traditional’ insurance products. These are useful for investors only in very specific cases, and only when the investors have understood the cost-benefit equations of these plans very carefully. The insurance agents very seldom do such elucidation; and hence it may be useful to stay away from these for a while.
KEY NEXT STEPS
Just as it is impossible to learn swimming without jumping into the pool, we believe a start has to be made sometime along both these dimensions. And there is no better time than today!
Thus, we would recommend a simple starting point for parents thinking about their child’s future:
Invest a lump sum in an index fund, and plan to systematically build this through authorising smaller additional investments monthly. You can look at research to see which are the good funds, and keep your portfolio under periodic monitoring.
The author works with PARK Financial Advisors Pvt. Ltd., Mumbai. He may be contacted at firstname.lastname@example.org.
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