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Archive for the ‘Education Planning’ Category

opt 3Having a girl child is a moment of great joy for parents! But planning for the darling daughter’s future is also something that is always top of the minds of Indian parents. Early and sound planning can go a long way in ensuring the future of your daughter. Following are some ideas that as a parent you could consider when planning for your daughter’s future:

Ensuring Medical Cover is in place:In an ever changing environment and the growing threats of lifestyle related health problems, children are no more immune to major health concerns. As such, having them medically insured should be on high priority. While a stand alone health policy might be excessive, including them in your family floater is a practical option. Depending on the policy you chose, the minimum age requirements can range from 91 days to 3 years old.

Investing for your Daughter’s Future:Indian parents today are still actively looking to fund for their child’s future. Additionally parents of the daughter are still largely expected to fund for the “Big Fat Indian Wedding”. Following are some of the investment options out there which parents could consider and evaluate basis their requirements:

 

 

  • Sukanya SamriddhiYojana: A government initiative to encourage Indian parents to invest specifically for their daughter’s future. It provides the highest guaranteed returns of all government investment schemes and is currently providing 8.4% p.a. tax free. Furthermore, contributions to it are eligible for tax deductions upto Rs. 1.5 lakhs under Sec 80C. While some might criticise its lock in policy, the other way to look at this that it is a significant tool to partially, if not fully fund, the most important requirements of the daughter i.e. Her Education and Marriage

 

  • PPF: Another popular government scheme. Similar to Sukanya SamriddhiYojana in providing tax benefits under Sec 80C. However the current tax free returns are 7.9%. With a 15 year fixed lock in policy, its highly advisable that the parents open the account during the daughter’s early childhood and invest regularly in it to achieve a sizable corpus.

 

  • Mutual Funds: A combination of Equity and Debt Mutual Funds are a great way to ensure both short and long term goals of the daughter are met. One needs to identify which type of mutual fund and subsequently which scheme under that type would be most appropriate to invest into basis the requirements.

 

  • Gold: An all time favorite for Indians. While traditionally Indians have always bought and kept physical gold, there are more convenient options now available. Gold ETFs and Sovereign Gold Bonds are becoming increasingly popular among Indian investors.Both track gold prices and have the added advantage of no storage/making costs and no risks of theft/tampering.

 

  • Child Plans: Various Mutual Funds and Insurance Companies provide plans that are specific for children. Most of these options have a stringent lock in period and take exposure in equity and debt markets.The lock ins on these plans may work in favor when parents are looking to match the lock-in with the daughter’s goals.

Estate Planning:As a minor, two aspects become critical in ensuring that whatever hard work that went into planning for the child does not go to waste in case of a sudden demise of one/both parents. A will helps to confirm who will be the legal guardian of the child in case of an unfortunate event. It will also ensure that the money meant to go towards the requirements of the daughter actually is received by her at an appropriate time and the wishes of the parents as regards their monies for the daughter are honored.

Parents are always concerned with providing for their children. As such, it is always advisable to start planning early on in the child’s life. Understanding the child’s near and long term needs is a good way to start planning. And the correct planning can ensure peace of mind and happiness for both the parents and the daughter.

 

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As a passenger, getting from point A to B simply includes sitting on your assigned seat and enjoying the flight till the destination. You are completely unaware of the preparation and planning that goes behind every flight.  A smooth flight is an end result of the meticulous preparatory work including facing any emergency.

All sorts of emergencies can happen during a flight. Engine malfunctions, instrument failures and unanticipated weather issues are just some of the emergencies pilots can face at any time.  In such times the long hours of training, learning from past experiences and pre flight preparations comes to the front and saves the day. Sometimes passengers are blissfully unaware of the issue and continue to enjoy the flight. All this all possible because one aspect, planning! More specifically, planning for an emergency.

Yet, more often than not, pilots in the Indian aviation sector seem to be unprepared for one kind of emergency that is their own personal financial emergencies.

Personal financial emergencies can be broadly classified into two types based on nature of emergency i.e. (A) loss of job or life and (B) unexpected big ticket financial commitments.

While both can prove to be a heavy toll on one’s finances, if we look back to the last 5 years of the Indian Aviation Industry, job losses have been a major theme throughout.

Now as a pilot you earn a handsome salary starting from a young age. Hence your lifestyle tends to be on the more plentiful side.  And this only increases in significant jumps as you climb higher in your career. As such expenses are always on higher side. Luxury cars, high discretionary expenses, significant EMI’s and top notch education for children. All well within your reach. That is as long as you continue to earn that kind of money.

But what happens if you can’t? What if salaries are not paid for months or worse, you are given the golden handshake. What then? Take a step back and think about this for a minute. Ask yourself, will I be able to continue to live the life I have led so far under such circumstances; at least temporarily till I can get things back on track?

A majority of pilots will fail to have an answer to this. And that’s far from ideal!

So what should you do now? How do you start preparing for such unforeseen events? A thousand questions and ideas might run through your mind. Maybe you can get it right, maybe not. But with the help of a trusted financial advisor, who knows the intricacies of the aviation sector, you could stand a much better chance of confidently facing such troublesome periods, safe in the knowledge that you were geared up for it in advance. Exactly like handling an emergency while flying a plane.

As professionals specialized in planning for the worse, it definitely be worth your time for us to meet and discuss how to enrich your life.

Till then, happy flying!

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blog picPilots are probably one of the most stretched professionals when it comes to time management. The constant flux in schedules is always a hassle. Even when you are not flying you are on standby which means that you are still on your toes. The weekly off standard in the Indian Aviation industry is one day every week. And money matters are usually the last thing you want to tackle on such a day. Life is already stressful enough as it is!

By most industry standards, Indian pilots take away a very handsome salary. The more experienced you are, the more significant are your financial takeaways. But it is not all rosy all the time.

With the high earning potential at a pilot’s disposal, it becomes vital to channelize these earnings to fulfil a whole set of commitments and dreams that are unique to a pilot’s life, both during their career and post retirement.

But what are some of these unique problems that only pilots face? Pilots for once, have to always be medically fit. And for good reason! Priority to healthcare hence takes prime importance. Now a pilot reading this might say, oh we are covered by our company, so I don’t have to worry above covering any financial cost regarding my health. But if you really think about it, is that actually enough?

Another thing which pilots always need to be on top of is upgrading their skill sets. Not so much a unique item, but very important nonetheless. And it does not come cheap. Preparing for it well in advance can be far more beneficial than just scrapping up every penny at the last moment to fund for this expense.

One another issue is the state of aviation industry and opportunities. The last few years have clearly demonstrated that problems are plenty in the Indian aviation sectors. For e.g.  Airlines have closed down, (leading large time periods of unemployment), pay can be delayed significantly or indefinitely. All these lead to great financial complications for pilots and their families. Preparing for such circumstances is prudent and must at all times be actively considered.

Probably the biggest challenge a pilot will face is retirement! With no more significant inflows, you are faced with a very real possibility of compromising on your lifestyle just because of a lack of proper planning and this change is not easy! This struggle can be easily avoided with some proper and sustained guidance throughout the earning years so that you can live through your golden years in comfort all the while fulfilling your passions.

Pilots are well aware of the importance of planning. Every flight involves hours of preparation beforehand so that you can take the best possible decisions in terms of route, landing approach and understanding weather patterns of the areas you will fly through, just to mention a few!

As a fellow professional with a prime importance towards professional planning, it would be definitley worth your time for us to meet and discuss how to enrich your life!

Till then..Happy flying!

 

 

 

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There was a time when most Indians saved in bank Fixed Deposits, insurance policies and PPF accounts for various goals including child’s education. However, with the cost of education escalating rapidly and domestic education aspirations turning to international, there arises a need for inflation beating products to invest in, for securing your child’s future aspirations. With PPF rates traditionally being kept at an elevated level plus their significant benefits of offering tax free income, the recent decision to make them market linked, and subject to a quarterly review, makes PPF returns a significantly more volatile product in our view. Relying on them in isolation for goals like your child’s education will not help.

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What to do?

If you wish to send your child abroad the cost of education will be higher. To be able to beat the escalating costs and to ensure you do not fall short of funds when you are nearing your goal you must approach it in a planned manner. Choice of products is important but strategy is equally important. When you know how far the goal is and what is the current cost, apply inflation to it to know the future cost. Do not forget to factor in possible currency depreciation impacts.

Choice of products is important but strategy is equally important.

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Strategy: Equities perform well over longer terms. Therefore, keep a higher percentage allocation towards equity. Take exposure to gold as a partial currency hedge in the portfolio. As time passes move towards fixed income exposure. When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

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Products: To start with, broadly divide your portfolio between equity, debt and gold. Based on your risk tolerance, choose products for yourself. Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts.. On the equity side use a combination of diversified equity funds and equity ETFs . Ensure that you stay diversified between sectors, Asset Management Companies and market capitalisations. You can also look at balanced fund which have approximately 65% towards equity and rest towards debt. Avoid exposure to direct equity, unless you can give it time. On the fixed income side you can look at PPF, debt mutual funds, and bonds. For gold you can look at gold ETFs and sovereign gold bonds.

Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts..

All in all, keep it simple and keep it flexible.

PPF still works, but only for a portion of the portfolio.

 

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Given the high and constantly escalating cost of higher education, especially for students going abroad, most parents find it difficult to fund their child’s education out of their own funds. Education loans have emerged as a highly beneficial instrument for funding this need gap.

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 Whom should you turn to?   

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Public sector banks remain the most popular source of education loans. With the RBI classifying education loans as priority-sector lending, PSU banks are more willing to lend. Private sector banks are not too enthusiastic about this loan. Non-banking financial companies—players like Credila Financial services (promoted by HDFC) and Avanse Financial Services (promoted by Dewan Housing) have also jumped into the fray. They try to compete by lending a higher amount, processing the loan faster, and by waiving the margin amount. However, their rates may be on the higher side than that of PSU banks.

What are the costs associated with the loan?  

Interest rates on education loans are usually 1.5-3 percentage points above the bank’s base rate. For example PNB (9.60-12.60%) offers one of the cheapest education loans. For SBI, the biggest lender in this domain, the rate is 11-11.30%, depending on the loan amount.

The processing fee could be 1-1.5% of the loan amount. Lenders may or may not have a prepayment charge on this loan.

According to the model education loan scheme formulated by the Indian Banks’ Association (IBA), loans up to Rs. 4.5 lakh are extended without any collateral, with just a co-borrower (usually the parent) required. For loans above Rs. 4.5 lakh and up to Rs 7.5 lakh, banks seek third-party guarantee. For loans above Rs 7.5 lakh, students and parents need to show collateral. Life insurance policies, shares, mutual funds, bank deposits, post office savings products and property papers can serve as collateral. The value of the collateral must equal the value of the loan.

According to the model education loan scheme formulated by the Indian Banks’ Association (IBA), loans up to Rs. 4.5 lakh are extended without any collateral, with just a co-borrower (usually the parent) required. For loans above Rs. 4.5 lakh and up to Rs 7.5 lakh, banks seek third-party guarantee. For loans above Rs 7.5 lakh, students and parents need to show collateral. Life insurance policies, shares, mutual funds, bank deposits, post office savings products and property papers can serve as collateral. The value of the collateral must equal the value of the loan.

All loans of above Rs. 4 lakh carry a margin money requirement: 5% on loans for studying in India and 15% on loans for foreign courses.

Women students and those admitted to a premier institute can get a discount on interest rate of around 50 basis points.

 What can you use these loans for?

The money obtained from an education loan can be used to pay for tuition fee, examination fee, library fee, hostel fees; travel expenses for going abroad; purchase of books and equipment, including a computer; and to pay the expenses for project work and study tours.  Try to take all costs into account when quoting a loan amount to the lender.

What are the eligibility criteria?

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 The borrower must be an Indian national and should have secured admission in an approved professional or technical course through an entrance test or selection process. Some banks have an age criterion (16-35 years) while others require certain minimum marks in the last qualifying exam. If you are applying to an Indian institution, it must be on the Indian Banks’ Association pre-approved list of 1,100 institutes.

Before approaching a bank or NBFC, compare their interest rates and processing fee. If you have got admission to a good institute, check if any bank has a tie-up with that institute. See if you can get preferential treatment from that bank, say, on interest rate, loan amount or collateral.

Before approaching a bank or NBFC, compare their interest rates and processing fee. If you have got admission to a good institute, check if any bank has a tie-up with that institute.

The high default rate of around 8% of the total education loan portfolio is nowadays making banks wary of giving out this loan freely and there is talk of the eligibility criteria being made stricter.

How is the loan repaid?

The bank grants a moratorium period of one year to the student after he has completed the course or six months after he has got a job, whichever is earlier. Then the loan has to be repaid within a specified tenure, which could range from 5-15 years.

The bank grants a moratorium period of one year to the student after he has completed the course or six months after he has got a job, whichever is earlier.

Banks grant an extension of up to two years if the student is unable to complete the course on time owing to factors beyond his control.

Pay the simple interest that is charged on the loan while your ward is studying. If you fail to do so, you may not get the 1 percentage point concession on the rate of interest that regular borrowers are entitled to. Doing so will also help lower your EMI.

What are the tax benefits?

The entire interest paid on an education loan (with no ceiling) is eligible for tax deduction under Section 80E of the Income Tax Act. This tax benefit is, however, available only for eight years and not more, even if the tenure is longer. No tax benefit is available on principal repayment.  To avail of the benefit of Section 80E, the loan has to be from an approved entity.

The entire interest paid on an education loan (with no ceiling) is eligible for tax deduction under Section 80E of the Income Tax Act.

What happens if you default?

Before taking an education loan, students and their parents should evaluate the job prospects and likely salary package after the completion of the course. If there is a default on an education loan, the credit score of both the student and the parents gets affected. This means that in future you will have difficulty in getting any loans and credit cards.

Before taking an education loan, students and their parents should evaluate the job prospects and likely salary package after the completion of the course. If there is a default on an education loan, the credit score of both the student and the parents gets affected.

If EMIs become due for 90 days, the loan gets classified as a non-performing asset (NPA) by the bank. Most banks wait for a month or two after the EMIs stop. If non-payment continues, they first issue a notice. Then they try to contact the loan guarantor. Only as a last step and after due notice do banks move to take possession of the collateral.

If the borrower agrees to start repayment once again, a penal interest rate of 2 percentage points over the regular interest rate is charged for the period of non-payment.

If you have difficulties in repayment, don’t try to avoid your lender. Inform him about your difficulties and try to get the loan restructured. Sometimes, banks do agree to lower the EMI and increase the tenure of the loan.

 If you have difficulties in repayment, don’t try to avoid your lender. Inform him about your difficulties and try to get the loan restructured. Sometimes, banks do agree to lower the EMI and increase the tenure of the loan.

Finally, the co-borrower (parent) should get an insurance cover equal to the loan amount, preferably a pure term insurance plan, to cover this liability.

The co-borrower (parent) should get an insurance cover equal to the loan amount, preferably a pure term insurance plan, to cover this liability.

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In the first article of this series, we had discussed the challenges you are likely to face in meeting your child’s higher education goal. Here we shall discuss the nitty-gritty of the investment planning that you need to do to achieve this goal.

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Goal setting

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Before you start saving and investing for your child’s education, you must set a goal regarding the amount of money you need to accumulate. Get an estimate of the cost of some of the major courses that your child might possibly want to pursue. To the current cost, apply an inflation rate of at least 11-12%. This will give you an idea of the amount of money you will need when your child is ready to go to college.

 Get the asset allocation right

Since this is a long-term goal for which you have at least 17-18 years, you should build an equity heavy portfolio. Around 70-75% of the child education portfolio should consist of equity or equity mutual funds. Unless you build an equity-heavy portfolio, you may not be able to earn a rate of return that beats the high inflation rate that sends the cost of education spiralling upward year upon year. Also, since this goal is a long time away, it doesn’t matter if your portfolio is equity heavy, since you can simply ignore the interim volatility.

 

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The rest of the portfolio may be invested in fixed-income instruments like Public Provident Fund (PPF), fixed deposits and tax-free bonds. If on the fixed-income side you wish to invest in debt mutual funds, choose funds whose average maturity does not exceed 4-5 years (longer duration funds will be too volatile). Among debt mutual funds you may also invest in long-term fixed maturity plans (FMPs).

Instead of using separate instruments on the equity and fixed-income sides, you could also invest in equity-oriented balanced funds. These funds maintain more than 65% allocation to equities. The advantage of investing in them is that even the debt portion of these funds receives the more favourable tax treatment that equities enjoy.

Instead of using separate instruments on the equity and fixed-income sides, you could also invest in equity-oriented balanced funds. These funds maintain more than 65% allocation to equities. The advantage of investing in them is that even the debt portion of these funds receives the more favourable tax treatment that equities enjoy.

If your goal is less than five years away, you will have to be content with using fixed-income instruments, where the return rate of return tends to be lower than from equities.

Pay heed to liquidity

When you are choosing the investment instruments for this goal, you have to be very particular about liquidity. The education goal has a peculiar nature. In the year when your child is ready to go to college, and for a few years thereafter, you will need large sums of money. The date when this money will be needed cannot be altered or pushed forward to suit your convenience. That is why the liquidity aspect becomes important. If you invest in an instrument like the PPF, ensure that the account will mature before your child is ready to go to college.

 The date when this money will be needed cannot be altered or pushed forward to suit your convenience. That is why the liquidity aspect becomes important. If you invest in an instrument like the PPF, ensure that the account will mature before your child is ready to go to college.

As you approach your goal

 About three years before your child enters college, withdraw money from the equity instruments that you have invested in. This precaution must be undertaken so that a downturn in the stock markets does not jeopardise your child’s dreams. The withdrawn corpus may be invested in less volatile instruments like short-term and ultra short-term debt funds and fixed deposits.

 About three years before your child enters college, withdraw money from the equity instruments that you have invested in.

Be well insured

Parents should also buy adequate term cover so that even in case of an unfortunate eventuality, their child’s education goal is not jeopardised. One rule of thumb is that you should buy term cover equal to at least 1.5-2 times the current cost of the education goal. For a more accurate assessment, you may need to speak to your financial planner.

Parents should also buy adequate term cover so that even in case of an unfortunate eventuality, their child’s education goal is not jeopardised.

What should you avoid?

Since the rate of inflation in education is quite high, avoid building a portfolio that is weighted in favour of fixed-income instruments like fixed deposits and recurring deposits. Investment-cum-insurance products from insurance companies may also not be suitable, especially if they are traditional plans, since their rate of return tends to be very low. It is best to buy two separate products: a term cover for your insurance needs and mutual funds for your investment needs. Branded products, which advertise themselves as being designed to help you meet your child’s education goals, whether from mutual funds or from insurance companies, offer no special advantages. It is best to go with plain-vanilla diversified equity funds that have a robust track record and relatively lower expense ratio.

Since the rate of inflation in education is quite high, avoid building a portfolio that is weighted in favour of fixed-income instruments like fixed deposits and recurring deposits. Investment-cum-insurance products from insurance companies may also not be suitable, especially if they are traditional plans, since their rate of return tends to be very low. It is best to buy two separate products: a term cover for your insurance needs and mutual funds for your investment needs.

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Saving and investing for your child’s higher education is one financial goal that you should begin to pursue as soon as the child is born. While the range of opportunities available to your child may be greater than you had in your youth, the fulfillment of those goals will only happen at a steep price.

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Let us get an idea of the sort of money you will need to fund your child’s higher education dreams. An undergraduate degree in medicine in India could set you back by Rs. 5.5 lakh to Rs. 50 lakh. If the child were to pursue the same degree in the US, the cost would skyrocket to Rs. 1.8-3 crore. An engineering degree within India could cost you anywhere between Rs. 5 lakh and 25 lakh. The same degree pursued in the US would cost Rs. 1.2-2 crore. An MBA degree in India could cost Rs. 15.5-45 lakh. The same degree pursued from the US could cost you Rs. 72 lakh to 2 crore. These are indicative figures that we have provided based on our research. If you have an inkling of the profession that your child is likely to pursue, do your own research. Alternatively, do research on the costs of most of the major courses. Visit websites of universities and institutes to get an inkling of the costs involved. Your research will show that higher education is prohibitively expensive. What makes this an even harder summit to climb is that the cost will not remain static but will keep growing each year. Financial planners say that education inflation is almost 1.5 times the consumer price inflation.

An MBA degree in India could cost Rs. 15.5-45 lakh. The same degree pursued from the US could cost you Rs. 72 lakh to 2 crore.

In addition, if you plan to fund an overseas education, you need to factor in a possible depreciation in the value of the currency as well. There has been a tendency for the Indian rupee to weaken against major developed world currencies such as the dollar, in the range of approximately 4% per annum in the last 25 years. This further compounds the burden of saving adequately for a child’s foreign education.

Thus, the overall inflation number chosen for education may be significantly higher than that of regular inflation.

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As has happened in other aspects of our lives, the education goal too has fallen victim to what is known as “lifestyle inflation”. This term basically means that as we turn more affluent, we are no longer content with the standard of life we had earlier. We seek to enhance it and in the process raise our expenditures. This has happened to the education goal as well. Our parents’ generation may have been quite content to study at government institutes, but for our children we want reputed private institutes that boast of world-class infrastructure. Children who have been raised in more affluent circumstances also become dissatisfied if they have to slum it out in government institutes having threadbare infrastructure. But studying at posh institutes comes with a steep price tag.

Our parents’ generation may have been quite content to study at government institutes, but for our children we want reputed private institutes that boast of world-class infrastructure.

Most upper middle class and wealthy families today aspire to send their children to foreign institutes for higher education. Education at these institutes is expensive, as the numbers mentioned earlier (for education in the US) demonstrate. Why higher education, today many students pursue the international baccalaureate curriculum in school, which prepares them to go abroad right after finishing their plus-two education. If a child is going to pursue both undergraduate and postgraduate study abroad, the parents’ burden doubles.

In the future, as the government of India liberalises its norms for higher education, many branded universities from the US, UK and Australia may set up their offshore campuses in India (as has already happened in cities like Dubai and Singapore). While the cost of studying at these campuses is likely to be lower than studying at the mother campuses, their fees will still be much higher than what Indian institutes charge.

Most upper middle class and wealthy families today aspire to send their children to foreign institutes for higher education.

If your child dreams of making it big in life by pursuing higher education, and you too have high ambitions for her, remember that fulfilling those dreams will cost a packet. As a conscientious parent, you should begin saving and investing for this goal right away. In the articles that follow, we shall offer a roadmap to help you achieve this goal.

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