Q1. I am a mother of two young children, 7 and 9. I work with a private company. I have been investing in mutual funds and direct stocks. I also maintain a certain number of fixed deposits for emergencies. How should I plan investments for my children?
Congratulations for taking the wise decision to start planning early for your children. This will ensure that providing for them does not become a burden for you at a later stage. Starting well planned investments at early years will not make you prematurely liquidate your long-term investments or dilute your retirement plans.
Let us look at some of the investment options available to your children.
Bank account
Opening a savings bank account for your children is the most basic and easiest thing that you can do. For minors, you can open and operate the account as their guardian. You can regularly deposit funds and earn a stable interest income. Please note that the returns from all these accounts may not be substantial enough to beat education inflation. Parking funds in these accounts can be done if the withdrawal is within in next 2-3 years
Public provident account
Compared to savings, FD and RD accounts, a Public Provident Account (PPF) offers a higher rate of interest. The maturity period is 15 years, and the government declares the rate of interest every quarter. In a PPF account, the principal, interest and maturity benefits are all tax free. Important to note that the total investment you can make into a PPF account (of your children and yours) is Rs. 1.5L only.
Sukanya samriddhi yojana
Sukanya Samriddhi Yojana (SSY), an investment for the girl child, is a government of India initiative. You can open an SSY account when your daughter is born or before she turns 10. This is a long-term investment with tenure of 21 years or until the daughter gets married. Once she turns 18, she can operate the account herself. The government declares the interest rate (currently 7.6%) on SSY every quarter.
Insurance policies
Some insurance policies and unit-linked insurance plans (ULIP) are designed for children. These come with a life cover and death benefit or maturity benefit. As the parent, you can pay premiums regularly. In the event of death, the death benefit will be available to the child. Or in the case of a ULIP, the maturity benefit will be available as a lump sum. In the event of the policy holder’s death, some policies offer waiver of pending premiums. This ensures that the child’s education does not get affected by the event.
Mutual funds
Mutual funds are riskier compared to other instruments but offer higher expected returns. The longer you stay invested in an MF, the better the return. Rather than put in a large amount at one go, you may find it easier to opt for a systematic investment plan (SIP) and invest small amounts on a regular basis. It is important to diversify your investments into different asset classes .
Q2. My father is 55, retiring in the next 5 years. Most of his current investments are in EPF, FDs, equities, and mutual funds. When he retires, he will also be getting gratuity. How do I help him in planning his retirement better? Where else can I invest for him?
As a loving and responsible son, you have raised the right question to help him live a happy, stress-free retired life. It is important to take this step now so that he can maintain his lifestyle despite rising prices, and the ever-increasing cost of medical care.
The first step is to get a holistic picture of the investments that your father already has and the quantum of money he is likely to receive (as provident fund, gratuity) when he retires. It is important to focus on income generation and capital protection of assets at the same time. You should also be careful with the asset allocation and choose a balanced portfolio which is as per his risk capacity and provide liquidity at the same time.
When your father receives the large corpus on retirement, you can look at investing it in the below stated investment options
Here are some options you should consider.
Senior citizen savings scheme
The Senior Citizen Savings Scheme (SCSS) is meant for individuals of age 60 and above. It is risk-free and saves tax under Section 80C of the Income-tax Act. The tenure is for 5 years, extendable for another 3 years. A maximum of ₹15 lakhs can be invested under this scheme. The current rate of interest on SCSS is 7.4% and the pay-out is quarterly.
Retirement or annuity plans
Retirement plans or annuity plans offer a stable quarterly or annual income and can help take care of a part of the post-retirement expenses. Certain plans offer tax-free returns and the total premiums paid are given back as maturity benefit. These plans are also available as unit-linked plans.
Mutual funds
A well-balanced mutual fund portfolio can be of great help during post-retirement life. The schemes range from ultra-short term debt funds to large-cap oriented mutual funds. You may want to opt for balanced advantage funds.
Insurance
It is very important to ensure that your father has a health insurance plan in place. If he has a corporate health insurance plan, that will lapse on his retirement. Invest in a separate plan now, so that you do not have to worry about the waiting period after retirement. You may also consider critical care plans that offer higher coverage at a lower cost for serious illnesses.
It is advisable to take professional help from a financial planner who can help you strike the right balance between prudent investments, your risk appetite and, most importantly, your father’s life goals.
Q3. I am an IT professional, working with an MNC and my wife is a teacher with a private school. Our son is 8 years old, and we have plans for his further education. While we earn well, we want to teach our son about money management. What is the right age to start? Also, how should we go about it?
We want to give our children the best possible life so that they are safe and secure. We spare no effort to teach them the basic life skills, but often miss out or deliberately avoid one essential skill—money and money management. The earlier you start teaching this, the better it is for your child.
Start with the idea of money
Start by teaching your child the very concept of money. By this age, your son must have learnt counting and basic calculations. You can relate this to real life. Introduce him to various currency denominations. Whenever you make a purchase with cash, make him know that you are buying something with money. If you are making a purchase through debit or credit card or buying online, explain that to him. This will help him understand the important role of money as a medium of exchange.
Why saving is a good habit
Introduce your child to a piggy bank as a basic way to save. Make him understand how once he has enough money in the piggy bank, he can use it to buy something he wants, provided the price is less than or equal to what he has saved. If he has been saving regularly, reward him by adding a little amount to his savings and introduce the concept of interest, which is how money earns money.
Account allowances
These days many young parents start giving an allowance to their children at a young age. If you are among them, ask your child to maintain a record of how much money he got, how much he spent and how much is left. Through this basic addition and subtraction, he will get an idea of income and expenses—rudimentary accounting.
Link effort to reward
As the child grows and you involve him in a little household work, you can choose to “pay” him for helping with the chores. This will teach him the idea of earning. That would make it two life lessons in one—it is important to help at home and one must earn his money in life.
B for budget
When your son requests something special on his birthday, ask him to keep aside a certain portion of his pocket money for that. This simple calculation would be a great introduction to budgeting.
Bank your savings
Open a savings account for your child, and whenever you are visiting the bank to deposit money in his account, take him along. If you are making an online transfer, let him see the process and understand what is happening, step by step. Encourage him to deposit the money from the piggy bank into his account. This will tell him that there is more to a bank than just a place where money is stored.
Start early and your son will find it easier to understand the basics of finance. As he grows, he will find it easier to learn about more complex concepts like credit, debts, investments, and taxation.
Q4. I am a 45-year-old professional. As a parent of teenage children, how do you suggest I manage and plan my finances?
As your children grow, so will their expenses—education, marriage, seed capital for business and so on. It is always wise to start planning for this early. However, while planning for your children, do not forget about your own life and retirement.
Most parents forget to plan for themselves when they provide for their children. Here is how you can do better.
Get help from a trustworthy expert
If you do not have the time or the expertise to manage your investments, appoint a financial advisor to guide and help you. The financial advisor will first understand your needs and then help you invest in the right product mix, plan for your future expenses including taxes and monitor your portfolio for necessary changes vis-à-vis changing market conditions.
Take stock of your finances
Your current financial position is always the right starting point. List your incomes and expenses, as well as your movable and immovable assets. Track your investments. Discuss your goals with your financial advisor and you will get an idea of what more you need to do and the changes you need to make. With your financial advisor’s support, you will be able to take the right decision every step of the way.
Allocate prudently, get the right mix
An important aspect of smart investing is how well you allocate your assets. Which investments should you choose and how much money should you put in each? Your risk appetite or risk-bearing capacity plays a major role in making the right allocation to reach your goals. As your financial advisor will tell you, no one asset class should hold a large chunk of your total investments.
In other words, distribute your eggs among various baskets. You may want to achieve some of your life goals in the very near future, requiring liquid funds. Other goals may be medium term or long term. Your advisor will help you with this division and allocate your investments accordingly. You will also get professional help to plan your taxes according to the latest laws.
Insure your life
It is important for you to calculate your life value and get adequately insured. Ideally, the insurance should be 20-times your annual income. Life insurance will provide financial safety to your children. There are different types of insurance plans available in the market. Some offer regular income after a certain period (which can help you with your retirement planning). There are also plans that ensure your children’s education is not hampered when you are no longer around. Understand the features of different plans. Your financial advisor will help you choose the right one.
Provide for an emergency
Create a corpus that can function as an emergency fund when needed. Set aside enough to cover your regular expenses for at least 6 months. In case of an unexpected development like the recent Covid outbreak, this emergency fund will ensure you do not have to liquidate your long-term investments.
Plan for your retirement
While planning for your children, do not forget yourself. Set aside a corpus that can help you after your retirement. Invest in retirement plans and funds with longer maturities. Equity-oriented instruments will help you beat the inflation. Make sure your retirement corpus also has the right product mix.
Prepare a will
Death is inevitable. But the financial agony and acrimony over your estate after your departure is not. Ask your financial planner to help you prepare a will and do your legacy planning.
Your financial advisor has the knowledge and the experience to help you make the decisions that work best for you. Once you have the satisfaction of taking the right decisions for yourself and your family, you can enjoy financial freedom when it matters most.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
International Money Matters Pvt Ltd is a SEBI registered personal finance firm.