|
Individual Insurance Planning and Personal Investment Planning by Cornerstone Wealth Management in India -- Prepare Mind - Harvard, here we come |
 |
 |
Rattan Chugh
ExpressMoney
Monday , November 13, 2006 at 1219 IST
Before you know it, your tiny tots will be ready to take the big leap. Are you financially ready to help them take it?
The Goels may be the archetypal upwardly mobile, middle-class family: two incomes, young kids, high aspirations. Vidhu, 38, a senior executive in a pharmaceutical MNC and Geetu, 37, an IT professional, want a bright future for their two young boys, Shubhang (8) and Aryan |
(5), an integral part of which revolves around education. Says Vidhu: “The standard of education in foreign universities is much higher. We want to be financially prepared for it. Even if it’s to study music, not medicine, it’s fine.” Although Shubhang , the elder, is about a decade away from deciding whether he will be prescribing pills or playing the piano, the Goels have started stocking away surpluses towards that goal. |
| |
| Compute costs |
| |
But all this doesn’t come cheap. Today, a professional degree in India can cost anything from Rs 4-10 lakh, a multiple of that for studies abroad. Then, there’s inflation to account for. Illustratively, assuming the cost of education increases by 8 per cent a year, the course that costs Rs 4 lakh today will cost Rs 16 lakh after 18 years.
Your first reaction might be of being overwhelmed. It might raise questions like, “can I afford to bring up another child?” However, a journey of a thousand miles begins with a single step. Saving for children’s education is similar to saving for any other long-term goal. |
| |
| Start saving early |
| |
You will benefit from the power of compounding your income earns returns, which also earns returns. A lump-sum looks daunting, but breaking it down into monthly amounts makes it look within reach. If your investment earns an annualised return of 11 per cent, a mere monthly saving of Rs 2,381 over 18 years will help you save Rs 16 lakh, enough for your new born to pursue an engineering course later.
The paradox is that, on the one hand, there are expenses that are getting steeper. On the other hand are expenses that are important but get postponed because you can’t resist the temptation of exciting, but less important, expenses. One of the cornerstones of a sound budgeting exercise is to not only plan how much is allocated to each expense head, but also to choose which ones should be fully funded, which ones partially funded and which ones not funded at all.
|
| |
| Invest well |
 |
Saving the requisite amount is half the job done. The second half is in choosing the right investments those that will help you maximise your returns. When you are investing for a goal that is a decade or more away, you have the benefit of time on your side.
A good chunk of your savings should go into equities, which have historically given higher returns than all other asset classes over long periods like 10 years. Since you won’t need the money for several years, you can stay invested through temporary dips in the market, something an investor with a short-term outlook cannot.
If you don’t understand the stock market to invest directly, there are equity funds. They provide diversification, flexibility and convenience, and are accessible. If you are saving every month, invest in a systematic investment plan (SIP) of a diversified equity fund with a good track record. There are options available where your monthly investment can be directly debited from your savings account, increasing investing convenience for you. You can even claim a tax benefit under Section 80C by making these investments in equity-linked savings schemes (ELSS).
On the other end of the risk spectrum, there is the PPF (public provident fund). The PPF is one of the last remnants of a government-dictated interest rate regime. The returns are great — 8 per cent a year currently, risk-free, tax-free, and it is eligible for the Section 80C tax break and you should milk it whatever it is worth, till whenever it is worth. Although the PPF is a 15-year scheme, you can extend the tenure as well as start making withdrawals, within limits, after the fifth year. You can even open an account in your child’s name. |
|
| |
| Stay insured |
While planning for your children’s higher education, an important aspect to consider is what happens if you’re not around? How will your dependents maintain their current lifestyle and pursue future goals, particularly if you are the only earning member and your children are young? Therefore, it is important for you to cover your death and critical illness risk.
Generally, it’s advisable to keep insurance and investment apart, as most plans that service both objectives are not the most efficient. The worst are endowment plans that insurers market by incorporating the word ‘child’ in their names. These plans are opaque and return just 3-5 per cent a year, something which Vidhu found out only last week, much to his chagrin. “A friend’s brother sold it to me. I trusted him blindly.” |
 |
|
| |
However, when it comes to financial planning for kids, one type of insurance plan, provided the costs are reasonable, makes the cut. In this plan, the insurer pays the sum assured in case of the insured parents’ death, as well as continues to pay the future premium to ensure that the fund accumulation for children’s education continues as planned.
Before signing up for any investment plan, review the fine print. Look at the lock-in period, commissions, load and redemption penalties, if any. With the discipline of staying with the budget and acting as per your financial plan, you will be prepared to help your children pursue careers of their choice. |
| |
| Good start, now follow through |
| |
Vidhu and Geetu Goel want the best education for Shubhang, 8, and Aryan, 5, and have begun saving for it. Says Vidhu: “We want to be financially prepared if the boys want to go abroad to study.” |
| |
| Their investments |
| |
The Goels estimate the cost of higher education, at current costs, to be around Rs 12 lakh each. Towards this end, they have: |
| |
• Opened PPF accounts for both kids. Current combined balance: Rs 1.6 lakh.
• Invested Rs 1.4 lakh in other post office schemes
• Two years back, they were sold an endowment policy with a guaranteed sum assured of Rs 6 lakh, and accident and disability cover (annual premium: Rs 37,574); and a Ulip with a sum assured of Rs 1 lakh (annual premium: Rs 24,000). |
| |
 |
| |
| Our advice |
| |
| That they are on their way is a big first step. But they need to do more: |
| |
• Their current savings and Ulip should add up to around Rs 12.1 lakh in 10 years (when Shubhang turns 18). The estimated pay out from the endowment policy should be in the range of Rs 9-11 lakh in 13 years (when Aryan turns 18). The Goels still have 10-13 years to that goal, but they need to save more and do so regularly (See table: How much more the Goels need to save?).
• Their Ulip and endowment plans are not the best way to go, but now they are in it, they might as well continue.
• Given their profile, they should increase their exposure to equities through mutual funds.
• The life insurance cover of Rs 7 lakh is quite low. The Goels should buy more term insurance to cover the risk. |
| |
| |
|
|
| |
| Home |
| |
|
