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Archive for the ‘Education Planning’ Category

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This 7th of December is the International Civil Aviation Day and marks the 50th Anniversary of the signing of the Convention on International Civil Aviation.The purpose of this day, as pilots all over might be well aware of, is to recognize the importance of aviation to the overall development of the world.

And while pilots draw great confidence from being able to manage the process of reaching passengers to their destinations safely and comfortably, a more pressing question can be that are they confident when it comes to management of their finances?

The profession of a pilot demands almost all their time all year round. Hence they are left with limited personal time which they wish to live to the fullest. And like most busy professionals,more often than not money management seems to come at the end of this wish list. Pilots go through meticulous preparation and planning for their flights daily but sometimes are unable to do so for their finances.

While money is not the end, it is definitely a means to achieve certain objectives. Proper planning and structure to a pilot’s personal finances can result in he/she being prepared for all kinds of life events and responsibilities. Events such as:

  1. Sudden Illness:The requirement for pilots to be medically fit is of prime importance as they are responsible for the lives of hundreds of passengers daily. Every pilot needs to ensure a good health cover to cover sudden illness and hospitalisation. A pilot may wonder why would he need insurance when he is already covered. But if one actually things about, it might be prudent to have a separate health insurance cover for times when you may not be employed or between jobs or in cases where employer insurance is inadequate.
  2. Need for upgradation of Skill Sets:Like all professions, skill updation is a critical requirement that must be met by all pilots on periodic basis. But these do not come at a cheap cost. Ensuring enough provision and funds are kept aside and is available at the time of requirement can go a long way in avoiding last minute stress.
  3. Contingency Needs: A major issue plaguing the aviation industry is the availability of opportunities. The last few years have clearly demonstrated that problems are plenty in the Indian aviation sectors. For eg. Airlines have closed down, pay cuts are becoming common, or there have been significant delays in salary payments. Such events can have huge financial implications on pilots and their families. Having contingency funds parked in highly liquid assets can help bring some normalcy in such difficult times.
  4. Retirement and Sunset Years:Insufficient planning for your golden years i.e. Retirement can cause stress. In case of pilots, who are among the top earners amongst professionals, this only magnifies the problem. Why so? Pilots more often than not tend to have busy lifestyles with high discretionary expenses. As such they are accustomed to a lifestyle that will only get more and more expensive as years pass This year on year rise in prices is called Inflation and it is an important factor that more often that not, is grossly underestimated. Furthermore, like any other busy professional, even pilots like to keep themselves occupied during retirement years. The interests or activities that they might pursue would also usually have financial implications. Activities such as investing into various ventures, pursuing hobbies or dream goals, continuing leisure flying by enrolling in the local flying club can be just some of the examples. To be able to fund these without affecting retirement corpus requires careful planning early on.

Take the case of pilot Mr. Sharma. Currently aged 30, the household expenses for him and his family is Rs. 12 lakhs per annum. Even if we assume a general inflation of 8%, the same Rs. 12 lakh will become Rs. 1.75 crores at the age of retirement at 65. ( Rules permit pilots to fly till the age of 65 ). In other words, Mr. Sharma would need to have a big enough corpus at retirement that will provide them atleast Rs 1.75 crores every year that will help them maintain current lifestyles.

Pilots are aware of the importance of planning. Each flight requires hours of pre flight preparation which means going through weather reports, system checks among other items to ensure that the flight goes by without any hitch. Similarly having a strategic plan in place for one’s finances can also help prepare for any “rough weather” that could come along in a pilot’s financial life.

 

 

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1 (1) (1)In a world where access to internet is becoming more and more widespread, information on almost anything is subsequently becoming easier to find, simply by “Googling” it. Furthermore, free information quite often results in self proclaimed experts of the field, sometimes resulting in unfavorable outcomes for anyone who follows their views/advice without understanding how such individuals arrived at those outlooks.

As such it is important to separate a few facts from myths in terms of what data an individual should consider when faced with some common financial planning aspects rather than what is most commonly/easily available of the internet.

Sending children abroad for higher education is no more a matter of consideration for the upper class families. Nowadays, more and more middle class families aspire to send their children outside India for their education. As such, planning for such an major event requires careful attention. The common misconception is to take simple average rise of Indian education costs and apply the same data for education in a foreign country. However, two critical data points get missed out in such an exercise, (A) the rise in education costs in that particular country to which you plan to send your child. It is inappropriate to consider the inflation numbers would be identical or even similar to that of India. (B) the rise/fall in the currency exchange rate for the two countries in consideration. The following illustration should help clear this concept:

Particulars % Change
Rise in average education cost of  universities in the U.S. in last 10 years 5%
Rise in Currency Exchange rate in last 5 years 4%
Total Inflation to Consider 9%

Now In comparison the inflation rate for the Indian colleges is approximately 10%-11% p.a.

Talking about inflation, another topic of debate is if the Consumer Price Index (CPI) data is an adequate inflation benchmark, especially for higher middle class/ HNI families. To put things in perspective, following is a snapshot of items considered in the CPI basket and their respective weight-age:

Sr. No Particulars Weightage
1 Food and Beverages 45.86%
2 Pan, Tobacco and Intoxicants 2.38%
3 Clothing and Footwear 6.53%
4 Housing 10.07%
5 Fuel and Light 6.84%
6 Miscellaneous 28.32%

(Source: Ministry of Statistics Programme Implementation Circular Dated 14th March,2017)

As you can see, the weight age of expenses, while more suitable for the lower strata of income generating families, might not be appropriate for the higher end. Something like expenses on food/groceries would certainly not be half the expenses. As such, while current CPI numbers are around 3.5%, indicating that going forward inflation is to be expected around that range, it would be right to assume that a middle class family living in Mumbai would face the same inflation rates. A more appropriate method would be to calculate the individual inflation of major expense heads i.e. food, rent, education, lifestyle expenses and find the average of the same. You would more likely discover a very different inflation rate compared to the CPI.

Past returns is a favorite filter for most investors when choosing products of an asset class, especially stocks and mutual funds. However almost all online data provided by various service providers show Trailing Returns.. Trailing returns show how a fund has performed from date A to date B, by simply seeing the difference in NAV of those dates. But it does not show how consistently it performed in that period. A recent upswing in its performance can skew the average of say a 3 or 5 year performance. To adjust for this, Rolling Returns is considered. It does not take only one block of a 3year period but several blocks of such periods. Thus it allows you to see a range of performances across blocks of time. They therefore capture performance of funds over different market periods, giving a more reliable view of the fund’s performance

Similarly, another topic of debate is usage of Total Return Index v/s Simple Price Index as a benchmark when selecting a mutual fund. A Simple Price Index only captures the capital gains due to stock movements in the fund. But the Total Return Index considers the capital gains and dividend paid by the companies to the investors. Hence it shows a truer picture of the returns. Almost all mutual funds today benchmark their returns against the Simple Price Index. This can result in showing higher alpha generation by the fund which may not give the right picture to the investor. For example, Nifty 50 Price Index over past one year (as on 27th October 2017) was 18.63 percent and Nifty Total Return Index for the same period showed 19.75 percent. Hence a mutual fund will show different alpha based on the benchmark used.

Plan Ahead Wealth Advisors believes that Rolling Returns and the Total Price Index are the correct data points to consider.

Finally, the widespread use of the general rule of thumb when it comes purchasing a Term Insurance Plan i.e. the sum assured is to be 15-20 times the annual income. Procuring a term plan should be about covering financial risks that may befall on the dependants in case of an unfortunate event. Financial risk does not only include loss of income but also other factors such as pending liabilities, future financial goals, current assets that can be redeemed shortly to meet any obligations. Such factors also play a significant role in determining how much cover needs to be taken.

Using the right data is critical during the financial planning process. As you can see, wrong data can lead to significant errors/assumptions which can have detrimental impacts.

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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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Image Source: www.uncwpse.org

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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Image Source: doablefinance.com

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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Image Source: finvisionconsultants.com

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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Image source: thehungryfish.com

 Whom should you turn to?   

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Imagesource: careerindia.com

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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 Image source: timesofindia.indiatimes.com

 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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