21 July, 2012

What options are available before an individual to achieve child related goals

We are always running after something. As children, we run after grades, then college admission, then a suitable job, then after a suitable mate, then children and then their education… phew. Education of children is a pretty long-term affair, which these days require huge commitments, in terms of time and money.
Now, lot of us don’t have time as we are immersed in our careers, trying to make money. But, since we don’t have time and competition is intense these days, we put our children in tuitions. That takes a lot of money again! We all know time is money and it’s full meaning is evident more than ever, when we pay the tuition fees!

Children’s education has always been a cherished goal for most. We would be willing to go hungry than see children’s education suffer. Since we attach so much importance to it, it may be deduced that we would spend time and effort to invest for it, appropriately.

Alas, that is not true in most cases. Though they intend to do their best, they put their money away in nice sounding schemes. Insurance companies have come up with policies specifically for catering to this goal. People do fall for the emotional tugs & the happy situations that these policies tend to portray. They also tend to think that if they have taken a child insurance, their job is kind of over. Insurance policies for children may have a role for those who want their insurance and investments bundled. For this convenience, it comes at a price.

For all others, there are several instruments available to build a portfolio with which to achieve the child’s education goals. There are lots of advantages to investing in a good bouquet of instruments. They are –

1.    Choosing the instrument/tenure & type, according to when the payments are due.
2.    Option to choose from among the various instruments
3.    Diversification among various asset classes
4.    Lower cost to you, as an investor
5.    Ability to change the mix as we go

Estimating the amount required for education is a tricky job in itself. One needs to extrapolate it with the benefit of some hindsight and trends that are apparent. The first thing one needs to do is to take a term insurance for an appropriate amount, to cover the child education ( and other ) goals. This will address the uncertainty risk. Today, term insurances are available for a song and securing a good cover is not difficult. Also, one needs to take an appropriate medical insurance. In a medical emergency, a person without a medical cover could be forced to use money being accumulated for another goal.

After doing that, determine as to when one requires the payouts. Based on that and based on the risk-return possibility of the instruments, one could suggest from the rich profusion of instruments available. PPF can be chosen if the child is very young and the money is required for graduation/ post-graduation. Since this is a 15 year tenure instrument, it offers decent possibility of accumulating a good corpus, overtime. Also, this brings in a certain solidity to the portfolio as it is a government backed scheme, which offers tax-free returns.

For shorter tenures, there are bank and company FDs. Currently, their returns are between 9-10.5%, which make them attractive. But the returns from these are taxable, which diminishes their attractiveness, to an extent. But since these are for shorter tenures and the returns are certain, they bring in predictability of cashflows.

Debt funds are good to have in one’s portfolio as they are tax efficient. Their returns may not be much different from FDs; but their post-tax returns are much better considering they are subject to capital gains tax and not normal taxation. If the tenure is over a year, indexation applies. Long-term capital gains are at 10% without indexation or 20% with indexation. Fixed Maturity Plans ( FMPs) offer the comfort of better tax treatment, just like debt funds. It further has the advantage of having a portfolio which is held to maturity and hence no volatility in returns.

Equity & Mutual funds are other investment options which have the potential to offer good returns over time, but may not be suited if the time period is less. For beating inflation, equity and equity oriented MF schemes remain the best bets. This could be contested now as the past 4-5 year returns are poor. While that is true, it remains the best chance to beat inflation over time – history shows us that. There have been other periods when the stock markets have not performed… yet, over time ( over 30 years ), it has been able to deliver 17% pa compounded returns. What is required in this case is patience – loads of it… and iron conviction that history will repeat itself.

Gold and property have been other assets which are fancied today. Property has long cycles. It will work only if one has a long horizon. It can work in the short-term too, but you just cannot take that chance as that would put your child’s education on the line. Gold is doing well in the past 10 years. If you look at how it has performed in the last 30 years or more, it is a lot less flattering. Investing in gold for education may not be very suitable.

We see so many options, which can be chosen judiciously would help us put together a good portfolio, to achieve the child education goal comfortably. No need to fall for advertising legerdemain. Just a little bit of diligence will help one to put together a portfolio to achieve child education goals.  

Published in Financial Chronicle on 19/7/2012; Article by Suresh Sadagopan

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