Q1. I want my child to save money. Can you please help me with a few tips which I can pass on?
Saving money is an important habit one should help children develop when they are young. Children who imbibe a healthy savings habit at a young age are more likely to grow into adults who are wiser with money and experience less financial stress.
However, the savings habit does not come easy. Here are a few tips that may help you as a parent.
Just asking them to save may seem pointless. It works better when they know why. What would they like to do with the money they save? Buy or do something? Help them arrive at a practical goal. Next, depending on the goal, help them break it down into manageable bits, something they can build over some time. Depending on how much they can save, help them figure out how long it would take them to reach the goal.
Separate wants from needs
Teach children the difference between wants and needs. Needs include the basics—food, shelter, essential clothing, health care, and education. Wants are the extras—like movie tickets, candy, designer sneakers, a bicycle, or the latest smartphone. They must fulfil what they need first before they consider what they so badly want.
Provide safe place to save
Younger children may start with a piggy bank. If this can be transparent, being able to see their savings grow will help to reinforce the savings habit. When the children are a little older you can help them hit the ground running by setting up their own savings account at a bank. You may need to operate the account for them initially, but make sure they know all that you do to operate the account. Soon they will be comfortable with the idea of real-world savings. When you think they are ready, you may even want to get a child-friendly debit card. This would be a safe and early introduction to cashless transactions.
Talk about money
Many families think it is not right to discuss money in front of children or simply do not bother to do it. It is always healthy to discuss money whenever there is a need. They should feel comfortable to ask you questions. You may schedule a time for a discussion about money or make it a part of everyday conversations. What is important is not to make money a taboo topic.
When the children are old enough, involve them in your discussions with your financial advisor. Over a period, they will understand the basics of financial planning and the rationale for various decisions. This early exposure will stand them in good stead when they are ready to handle their own investments or to get professional help to handle their money.
Q2. I want to invest in real estate, but I don’t have enough money to buy a property. Is there any other way I can take advantage of investing in real estate?
Real estate investments may be classified as income-generating or growth-oriented. Income-generating investments focus on rental income, while growth-oriented investments seek to benefit from value appreciation over time.
It is not necessary to buy a physical property to take advantage of real estate investment. You may consider one of the following options.
Real Estate Investment Trust (REIT)
A real estate investment trust (REIT) owns and manages a pool of commercial properties, mortgages, and other real estate assets. REIT shares can be bought and sold in the stock market. REITs typically offer investors high yields, as well as a liquid method of investing in real estate.
REITs usually invest in commercial properties and distribute the rental income as dividends to unit holders. REITs function like a securitized real estate-linked investment pool that allows investors to participate in small amounts. On the one hand, these securities help to make long-term investing in real estate more accessible and income oriented. On the other, they help to build an efficient secondary market for developers to exit projects.
The physical dimension of real estate is often considered unorganized. There can be an element of ambiguity about the value of various transactions. As against this, a REIT is regulated and managed under a trust umbrella. There is accountability. How the investor funds are used is audited. There is a specified method for the valuation of properties, thus reducing the ambiguity.
REITs help investors channelize their investments into India’s realty sector through a regulated mechanism. As the investment is asset-backed, investors are spared the hassle of verifying property titles and a plethora of regulatory formalities. REITs are managed professionally and provide transparent disclosures.
REITs provide a hedge against rising inflation, as 90% of the profits are distributed annually as dividends. The minimum investment ranges between Rs. 10k to Rs. 15k.
REITs provide an exit option to developers and investors in commercial or retail assets and address the liquidity concerns of an illiquid asset.
Real Estate Mutual Fund (REMF)
A real estate mutual fund (REMF) is a close-ended (with a fixed maturity period) mutual fund scheme that invests only in real estate. The investment is in the form of either physical property or securities of companies engaged in the real estate business. The pooled money is used to buy a piece of real estate instead of shares of a company as in the case of regular mutual funds.
REMFs make it possible for small investors to invest in real estate as an asset class.
The Securities and Exchange Board of India (SEBI) has provided the following guidelines for REMFs.
- Existing mutual funds are eligible to launch REMFs, if they have an adequate number of experienced directors or key personnel.
- Those seeking to launch new REMFs must be active in real estate business for not less than five years. They must also fulfil all other eligibility criteria applicable for sponsoring a mutual fund.
- Every REMF scheme shall be close-ended, and its units listed on a recognized stock exchange.
- The net asset value (NAV) of the scheme must be declared daily.
- At least 35% of the net assets of the scheme shall be invested directly in real estate assets. Balance may be invested in mortgage-backed securities, securities of companies dealing in real estate assets or undertaking real estate development projects, and other securities. Taken together, investments in real estate assets and real estate-related securities shall not be less than 75% of the net assets of the scheme.
- Each asset shall be valued by two valuers, who are accredited by a credit rating agency, every 90 days from the date of purchase. The lower of the two values shall be taken for computation of NAV.
- Caps will be imposed on investments in a single city, single project, securities issued by sponsors or associate companies, etc.
- No mutual fund shall transfer real estate assets among its schemes.
- No mutual fund shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during foregoing five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights.
- No REMF can undertake any activity in lending or housing finance.
Q3. I am employed with a private company. I am a regular, consistent investor. I need your advice on selling my equity investments.
You are right to pause and seek advice before you sell your stocks, especially in the current market conditions.
As a regular investor, you must have noticed that the stock markets are back where they were a year ago. There is no predicting the stock market twists and turns but many fear things can get worse.
So, before you redeem your investments, ask yourself a few questions.
Did I plan to sell now?
If redeeming your investments now was a part of your original financial plan to meet some goal, then please go ahead. If not, please stick to your investments and do not redeem now.
Am I selling due to a correction in the market?
You know that market investments carry risk and there is no escaping volatility in equity investing. Do not worry much if the loss in your portfolio is in line with the market correction. If it’s significantly more, then evaluate your original investment strategy. Take your decision accordingly and sell your investments if there are liquidity requirements.
Am I sticking to my asset allocation?
Asset allocation helps you book profits at the right levels and reduces risk in your portfolio. If you are selling your investments to rebalance your portfolio, it’s a valid reason. Go ahead!
Is my investment performing poorly?
If your investment has been underperforming in the short-term (3 to 4 years), do not exit in haste. Revisit the original rationale for your investment and see if they are still valid. If this works, always stay invested.
Have I considered costs?
Selling your equity investments involves costs—brokerage, securities transaction tax, capital gains tax, exit load, etc. Before you calculate the net gain or loss, factor in the total cost of the transaction.
Do I have a better opportunity elsewhere?
If you finally decide to sell, is there another stock or mutual fund that you have identified that is likely to give you better returns? Identify this before you sell. Don’t let the money sit idle in your bank account.
The answers to these questions will help you decide if it is a good idea to sell or not. Want to dive deeper and get a better idea of all options in line with your goals? Consider engaging a financial advisor to help you with the same. There also an opportunity cost attached to every investment you do not do.
Q4. I got my first job six months ago. I want to invest a percentage of my income in mutual funds to generate wealth and ensure financial stability. How do I do this?
As you are clear that you want to ensure stability while generating wealth, mutual funds are the right option for you. The best option would be to invest through the SIP route.
Systematic investment plan (SIP) is a facility that different mutual funds offer for generating wealth in a systematic, disciplined manner. For many like you, who wish to invest a part of their income regularly, SIP is a very practical and popular option.
- It is a regular investment plan. Your investment frequency may be monthly, quarterly, half-yearly, or annual.
- Through investment in SIPs, you can convert your savings to long-term wealth that yield better returns. This would eventually generate wealth and ensure financial stability for you.
- SIP offers the power of compounding. Small amounts of regular investments can lead to an exponential wealth in growth.
Consider the following example for a better understanding of the working of a SIP:
Suppose an individual starts a monthly SIP in XYZ Scheme for an amount of Rs. 10,000. Given the return on the scheme is 12% p.a.
The market value of the investment after investing for 2 years is:
|SIP Amount (in Rs.)||₹ 10,000|
|Return (in %)||12%|
|Investing period (in years)||2|
|Total Investment (in Rs.) |
|Market Value after 2 years||₹ 2,72,432/-|
The market value of the investment after investing for 5 years is:
|SIP Amount (in Rs.)||₹ 10,000|
|Return (in %)||12%|
|Investing period (in years)||5|
|Total Investment (in Rs.) |
|Market Value after 2 years||₹ 8,24,864|
You get the option to select the investment amount, frequency (monthly, quarterly, or annually), and the tenure of the SIP. You cannot change anything once the SIP starts.
You can change the investment amount according to your need. This gives you an option to respond to changes in the market.
You can increase the investment amount according to predetermined interval, as a percentage or as a fixed amount. This helps to take fuller advantage of the power of compounding.
This type of SIP best suits those who are experts in finance including the market. This SIP is executed online according to the market movement, index level, etc. As the name suggests, it is triggered if the situation is favourable.
It is a never-ending SIP that continues until you stop it. This is best for those who are not investing for a specific goal or objective.
While SIP might be your best option to invest in mutual funds, you must first be clear about your financial goals. Invest in a financial advisor to better understand your short- and long-term goals and to chalk out a financial plan accordingly.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.