In this episode, expert Nisreen Mamaji explains how you can plan your investments with your children in mind.
Hrishi K: Hello and welcome to NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. I'm your host Hrishi K and this podcast is all about getting your money to make better investments for you in the new financial year.
Don’t we all want the best for our children? Well, just like you and me, all parents envision a bright future for their children. But are we all sure of doing it right? A big part of planning a secure future for your child is by making sure to do some smart financial planning.
Your child’s future is in safe hands as long as you’re around but it also becomes your responsibility to make sure your child’s future is safe even if something happens to you. You wouldn’t want your child to face any kind of problems without you being there, right?
To avoid any such scenario, investing in a child’s plan becomes a must. This will not only help your child to achieve his/her dreams but will also help them overcome any hurdles that come their way, in your absence.
There are a lot of ways you can plan a secure future for your child. This will also include finding the right investment and insurance plan and planning ahead for their future needs. But with so many options, how can we make sure we do this right? And that’s exactly what we are going to be talking about in today’s podcast.
In today’s episode of Invest – O- Cast we are going to be talking about securing your child’s future especially in terms of financial security with the help of advice from the industry expert of the day.
Hrishi K: National Stock Exchange (NSE) with the help of Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl is committed to break the limitations of geographical boundaries and reach investors across the country. In today’s episode we talk about, securing your child’s future.
To help us with this, in this month of women, I have with me the first women speaker on Invest – O- Cast, Nisreen Mamaji, CEO at MoneyWorks Financial Advisors. Nisreen is a certified Financial Planner for nearly 2 decades now. Her rich experience has helped NRIs, HNIs, retail investors with goal setting, financial plan creation & execution and review of plans. She believes in unbiased and unrestricted advice to her clients.
Hey, welcome to the show Nisreen! Great to host you on the show and as always we would like to know more about our guest which in this case is you and your efforts behind financial education and awareness in this country.
Nisreen Mamaji (CEO, Money Works): Hi Hrishi, it is very great to be here. So typically I host for the awareness program yearly and aptly name them Nimbu Paani with Nisreen. Typically what I also do is I send out infographics and relevant information nearly every day to my set of customers. I edit the newsletter for the foundation of independent financial advisors where in we try to give out topical information’s to our members, you know platforms such as LinkedIn, Facebook, Twitter are some of the other platforms that I adopt. For discriminating current information on interest rates, monitory policy committee decisions, their effects on yields of debt funds etc. NSE in indices movement such as the Nifty small cap, mid-in small caps, Nifty large and mid 250, Nifty mid-cap 50 or 100 or 150 are some of the information that I also broadcast regularly. By observing and tracking these trends investors understand the decisions that we take jointly and this helps to empower all potential investors at largest well. These are those initiatives that I have adopted.
Hrishi K: You know I have always said this that the Hollywood guys get their Super Heroes all wrong, there are the Wonder Women and the Super Girls, it is people like you who are handling illustrious career and juggling life with your family and children, you are the real super heroes. How did you plan securing your child’s future? Therein we can learn from that and plan our own.
Nisreen Mamaji (CEO, Money Works): Of course, so my children are 25 and 20 now. My son studied engineering abroad and you know I would like to share what I did for myself before I you know really started helping others. So I started SIPs for my children and what I typically did was 50% in multi-cap funds, 40% in mid and small and about 10% in focus funds. I began my journey in 2005 and my first investors were my children, until then I used to invest in recurring deposits and the savings habit fortunately was inculcated in me by my parents, because my father used to invest directly into equities as well as into insurance policies and PPF for himself, as well as for me. Therefore the awareness of different instruments was already into place such as what debt is and what is equity? When I got into this industry, obviously I put my money where my mouth is and I started SIPs as well as lump sum wherever I had some extra money. I was also very conscious to banks all the gift which were given to my children on birthdays and festivals and not to buy expensive gifts for them. Little kids really cannot appreciate the value of an expensive gift. And it is up to parents to make birthday special and I think it is more important to be spending on inexpensive items and to actually spend time with your kids that is what really they value the most. But also just saving is not enough, one must think of investing that is upping your risk tolerance and not being satisfied with low returns offered by traditional products such as fixed deposits or an insurance policy just because they might be guaranteed. Doing your due diligence and gathering information or at least trying to set up an interview with a mutual fund distributor or a certified financial planner is the key job of an investor. So I think really the earnest is on you.
Hrishi K: Wonderful that you would open up your financial life like an open book as it were. So thanks really for those thoughts. So, as you know NSE Presents : Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl is all about helping people learn about their finances on the go…we would like to actually take a microscope and now focus and get a little bit of help from you on child plans. Especially, where to start and how to go about it?
Nisreen Mamaji (CEO, Money Works): So there are several structured child plans in the market with fixed allocations towards debt and equity. The funds are eligible when the child is 18. You know the funds can be withdrawn at that time. So when a child mutual fund is taken the investor will typically not want to redeem or withdraw without thinking properly. It discourages investors from exiting suddenly without sticking to it at least for a substantial duration. When most of your assets are in funds which are invested in equity then your scheme will be considered as a hybrid equity scheme and vice a versa if you have invested in a scheme which has more of debt it would be considered as a hybrid debt oriented fund. Of course, another option is instead of going for a structured plan which has a fixed allocation, you can visit a certified financial planner and create a basket of mutual funds which you have year marks specifically for college, post graduation and marriage of the kids. This will ensure that you do not stop the SIPs or withdraw from funds from immediate requirements. Child planning should be actually part of your comprehensive financial plan, therefore you have to balance your retirement needs as well as preparing for your child’s future. So it is really quite a cake work and you cannot do one of the expenses at the other. Also it is imperative to think of higher education cost, since I find many young parents who come to me are spending huge amounts on current education even from KG to 10th. So then where is the money to save for the future of the child’s graduation, post graduation, marriage etc. So I think you also have to consider that this much money and how you are going to allocate it. Our expert advice is prudent to create a comprehensive financial plan which incorporates a child’s planning as well; this will ensure that all your goals are met effectively. Of course, with this option, the plan I will create a basket of funds where in the possibility of returns might be higher than if you take a structured child care plan.
Hrishi K: What are the most important things that people should keep in mind while planning for their child’s future Nisreen?
Nisreen Mamaji (CEO, Money Works): So typically what one needs to do is, different goals for different phases of your child should be actually written down, so that you work towards attaining that, for example a child’s schooling, higher education and health care needs, wedding plans these are some of the requirements that every parent will definitely think of and want to plan towards. Most gift mutual funds also create an elective lock-in facility. This enables the investor to ensure that the investment will be protected till the child is 18, so before investing in children’s gift mutual fund it is necessary to compare this against other equity funds in order to evaluate the opportunity cost, this helps an investor to choose the most appropriate mutual funds scheme that could generate high returns. So you have to keep in mind the tenure and do you due diligence as well. Structured plans typically charge around 1% as exit load, when an investor wants to redeem the fund before completing one year. When you plan to exit a child mutual fund you will have to be prepared to pay an exit load of up to 4%. Moreover the minimum period for an investor to stay with a child mutual plan can go up to 5 years. These are some plans that charge an exit load even if one quits mutual fund scheme after 7 years. So there is a structured plan and there is a basket of equity mutual funds which you yourself will create. Then later you have to stay invested for about 1 year in order not to attract exit load and with the structured plans the loads will be higher and the lock-ins are higher. So if you don’t want to do it yourself, you know if you think that you would like to consult a CFP or mutual fund distributor who will year marks funds for your child keeping in mind the ages of your children, your risk tolerance, your investible surplus and other family demographics. So when you make a plan like that it is really something that you can attain.
Hrishi K: Great! That was pretty comprehensive. But the timing of it, we haven’t got that answer out of the way. What is the right time to start that planning for your child’s future?
Nisreen Mamaji (CEO, Money Works): You know if you want the magic of... the power of compounding to work in law of favor what it means? It means earning interest on interest, you know just in layman’s term. So this leads to geometric growth in your investments or savings. You can start with a small sum, as the key is not the initial investment but the duration of the investment. Therefore I think Hrishi the best time to start is when the child is born. Since the structured child care plan is the only fund wherein donor gifts are allowed, grandparents, uncles, aunts, relatives friends can all become donor to your child and the money gifts that are usually given at birth should be encouraged as a child care plans by the parents themselves. Rather than accepting a box of gift if you just inform everybody that you would like an envelope bank it and then invest it in the child’s name it would be much better. Over the years on birthdays, festivals these gifts continue, so basically instead of buying toys or books or banking this cash, the parents should accept cheques as a gift in the name of the child and to encourage this practice the child should make a thank you card to the donor and mention the compounded value of the gift till date. This is really a wakeup call to the relatives and reiterates the power of compounding. Third party cheques can be accepted from others but parents themselves should also invest for their child from day one by opting for multi-cap or mid and small cap funds since the tenure is really quite long. Keep in mind that the volatility or movement of NAV upwards or downwards should not affect the investor and he must continue to steadfastly invest irrespect of the market movements. So the best time is now. If you haven’t done it earlier, do not lose heart and start immediately. If your child is older than the returns expectation and corpus might have to be modified but at least if taken the crucial first step.
Hrishi K: True that. What are the different ways and areas of investments, you know stuffs that parents can actually demark it and opt for, for their children?
Nisreen Mamaji (CEO, Money Works): So basically here we have a 3 tier one. There are 3 distinct entities involved in the process, the sponsor who creates the mutual funds, trustees and the asset management companies which oversees the fund management. The structure of mutual funds is coming to existence due to SEBI Mutual Funds Regulation Act 1996 and under this regulation a mutual fund is created as a public trust. The first step of course is to get your KYC done of both the parents or either. Next step that I typically use, you know I use the NSC NMF platform wherein we create the investor identification number. Now this is an online platform which facilitates subscription, redemption, systematic investment plans, systematic withdrawal plan, systematic transfer plans and all other transactions the mutual fund units. This online platform works beautifully since we can invest and transact without paper work besides being environment friendly, we save a lot of transaction time as well. So the proposal of the recommended asset allocation and the names of mutual funds is the next step after creating an IIN. This is typically shared with all perspective clients and for a child care plan I would typically suggest multi-cap funds. So about 50% of the portfolio you can put aside in a multi-caps fund which doesn’t have a cap bias and the fund manager can decide whether he wants to put in into a large cap, mid cap or a small cap. Then you can also have a mid cap exposure. So I suggest about 20% in the mid-caps, 20% in the small caps, focus funds which invest in a fix number, in a fewer stocks that are diversified equity fund could also be an option of up to 10%. So after the client has been presented this plan and of course he/she has approved, the execution will take place, where in the cheque is issued and the monthly SIP is authorized. Regular reviews of the plan are undertaken to ensure that we are on track and to make changes if necessary. Long term plans do involve changes of course since the financial situation of parent might change, there will be a birth of another child or whatever so you know in the reviews we do make the necessary changes but the idea is that these are the typical 4 steps that typically one can adopt.
Hrishi K: Nisreen much has been shared and written about picking the right insurance plan for an adult. How important do you think is picking an insurance plan for your children and if so, how does one choose that insurance plan for the child?
Nisreen Mamaji (CEO, Money Works): So basically for the child is not an income earner, so what we try to do in insurance is the whole concept of insurance is to replicate the financial earning ability of the parent. Now since the child is not earning that question might not arise as to you know do you want to insure the child himself of herself. Best option for a parents to take a term plan which is a Vanilla Insurance cover which is renewed every year without any saving component, the charges on these funds on this plan is much lower than other insurance plans which are bundled with savings options. Calculation of cover is annual... would be an annual expense of the family multiplied with the year left for retirement. For example of you are 35, your annual expenses are about 10 lakh rupees and the required covers is 10 lakhs multiplied by 25 years of service that is about 2 and a half crores. You can add current value of your home purchase, child education and marriage, pension for spouse to this above figure which could be in the range of 3 and a half crores. So the total cover that you would need would be around 6 crores and the cost would be approximately rupees 50 thousand per annum, so as far as insurance goes I think the parents should take a term plan and cover their life and with the extra funds, you know rather than taking a bundled of insurance plan you could invest into mutual funds for your child and yourself. Now many insurance companies also float these child care plans which cover the parent and in case the parent is no more than rest of the premiums are waived. The cost of this plans are a little high, plus the returns are slightly lower than what you could get with taking an insurance plan and a mutual fund combination. So please explore both and see what fits your interest you know the best way.
Hrishi K: And finally, let’s have some quick points from you Nisreen for our listeners to definitely keep in mind while planning that secure future for their children.
Nisreen Mamaji (CEO, Money Works): So start early and don’t procrastinate, I think I cannot repeat that enough. Start with whatever investable surplus that you might have. One always waits for enough or more but the smart thing to do Hrishi is to start with whatever you have. Do it yourself it is fine but take a little risk and consult a certified financial planner or a mutual fund distributor or advisor, so that you have a Saathidar who will hold your hand during difficult market moments and suggest funds which are the possibility of out-performing of the structured plans empower yourself with education and knowledge. It is your child and money at stake and of course be informed. Track the NSE indices, read the money pages of news papers, watch a few mutual fund shows but take necessary first step.
Hrishi K: Wonderful! Well, I am sure; today’s podcast has been extremely insightful for all of you who have listened. It has definitely given me insights to go back and plan a few things better for my daughter.And now, I am going to take our listeners through some key points listed by our Nisreen Mamajii. This is our “Wisdom in the bank” segment. Hope you all find them useful and you will definitely implement them while planning a secure future for your children
- Ask grandparents, friends or relatives to gift your child cash and not gifts in boxes or presents
- Bank this money, do not splurge
- Don’t spend all your investable surplus on the education of the child today but start preparing for college and post-grad when your child is born
- Integrate child plans into overall financial plans for you and the family
- Start a relationship with the trusted distributor just as you would with a family doctor or lawyer, this person would be very important for your financial help..
Happy Investing! Nisreen, thank you so much for being on the show today it was absolute pleasure. Lots of parents must have benefited with that advice you gave and positive they would start working towards securing their child’s future.
Nisreen Mamaji (CEO, Money Works): Thank you it was always a pleasure to meet you and it was lovely being on the show. Thank you!
Hrishi K: Well yes, You can make sure your child’s future is secure even when you are not around if you plan early, take into account the requirement keeping not just the school fees in mind but also the other kinds of expenses that come with education and growth. Plan your will, insure their future and also make sure you teach your kids about money as early as you can. It will help them value and utilize it in a much better way. Just like our personal finance decisions evolve from the learning we have gone through during our growing years, help your child go through the same journey as well. Remember the ‘Piggy Bank’. It was one of the first things that inculcated a behavior of savings and the same can teach your child achieve their goals with a limited earnings as well.
And that is a wrap on our show NSE presents Invest-o-cast! I'm your host Hrishi K for the NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. To know more about our podcast, log on to moneycontrol.com, www.moneycontrol.com and visit the podcast section. In case you would like us to address any of your investment queries on our show do write into us at: firstname.lastname@example.org, email@example.com. You can also reach out to us on Twitter @moneycontrolcom or Facebook @moneycontrol.com ; do remember to use #nseinvestocast that’s #nseinvestocastThank you for listening!