Are you a responsive parent who cares for the future of their children ? The mere fact that you are reading through this article proves that you do believe in creating a bright future of your kids. So what are you doing currently to safeguard the future of your children ? Probably your kids may be going to the best school, eating the best food, having extra classes to inculcate the skills that would help them in their future. Though these are essential and would definitely help them in their future, what are you doing to help them acheive their future ? Have you planned out how would you finance the future expenses of your family and kids?
Why should I do it now ?
This is a very important question and it is very effective to know its answer in the early stages of life. The answer simply being, wealth doesn’t get created overnight. Today the cost of higher studies such as MBA may cost around 10-15 lacs INR. Assuming that your child would need to go to a MBA school 15-20 years from now, the same MBA degree may cost over 30-50 lacs taking into account the high level of inflation. If you don’t start early to invest, it may become very difficult for you to finance the cost of your child’s further education.
Okay, I got it. What should I do today for future ?
It is important that you should arrange for an appointment with your financial advisor who would help to plan out your finances so that the future needs can financed without much difficulty. You can visit http://banyanfa.com/banyanfa/infrastructure_services/financial_planning.html to know more about what it entails. Moving on, the core concept is around creating an investment pot which shall help you to finance the future expenses of your child’s educations. There are multiple products and tools available to get this done. Lets touch upon them one by one:
Insurance
Before we even start upon the topic of investments, lets first get the risks out of the picture. The first insurance which you need to take is a Term Insurance of your own life. One of the biggest risk that you may not be able to achieve your plans is your life. Have you ever thought what would happen if something happens to you. This is better thought once and taken care of and then forgotten for life. Term Insurance helps you in this process. You can read our link for more details on Term Insurance http://banyanfa.com/banyanfa/insurance/life_insurance.html . This will ensure that all your plans are intact and your family can financially cope even when you are not around.
Public Provident Fund / Provident Fund
Simply called as PPF and PF. PPF is maintained by an individual by opening an account with the recognised banks. PF is opened by your employer. You can invest upto Rs. 100,000 in PPF per year. There is no limit on how much you can invest in PF. It is deducted by your employer from your monthly salary. These are tax free options of creating your investment pot with gauranteed returns. Currently the returns are approx 8.25% p.a. PPF & PF employ the concept of power of compounding and builds up your capital over a period of time.
Buy a Property
Aah! I have touched upon every one’s dream – isn’t it ? But you must remember, the property which you have bought for you to stay is not going to get considered in fulfilling financial plan. You may not like it, but a self occupied property is the biggest dead asset purchased as it won’t provide you any returns, though it may save you some rent expense. If you may do some calculations, generally the rent is not more than 2-3% of the value of the property ! What I am referring to here is buying an investment property which you can liquidate in future to finance your kid’s education. Property purchased and held for over 10-15 years give blasting returns – generally more than any other asset class. The biggest challenge while investing in property is the bulk amount needed to finance it as well as securing the property from the so called bho mafias (property dons) due to poor property laws.
Equity
Another one of the best available long term investment products is investing into good quality shares with a very long term horizon. Probably investments in Equity shares are the next best available option after Property. Equities have traditionally given over 20-30% year on year return over long term period. I am not suggesting that this may be the future trend, but if the companies in which you are going to invest would grow at a healthy rate, then it is very natural for their share prices to grow at the same rate.
If you don’t have the time and energies to invest directly into shares, then the next best option is to invest via Mutual funds. Mutual funds are professionally managed and provide returns equivalent to stock markets. One of the best tools available to invest into Mutual funds is via Systematic Investment Plans. Refer to our other blog note on How SIPs Work.
Child Plans
Many insurance companies have come up with long term investment options named as Child Plans. These are long term insurance linked investment plans. Though these do meet the purpose, but I am not a big fan of such plans. Any long term child plan would either be investing into a combination of debt and equity. You can create your own Child plan by investing your debt component into PPF / PF and Equity component into a mutual fund SIP / Shares. The insurance component can be met via taking an independent Term insurance policy. The products offered by companies in the name of child plans are often disguised with high fund management and administration costs which steal a big pie of the return over a long term period.
You can arrange for a financial planning appointment by visiting Banyan Financial Advisors via our website www.banyanfa.com.