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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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In today’s volatile environment which largely stems from economic uncertainties from global markets, be it the Yuan devaluation some time back or Brazil being downgraded to junk or the September Fed meet on which everyone had an eye which resulted in no rate hike at the moment. The thing which most investors lose focus on is something that is called as long term investment perspective. By investing for the long term one will not try to time the market. Nobody can. We all know the simple rule of investment – buy at low and sell at high but invariably we tend to do it the other way round.

While focusing on short term we tend to buy stocks which have all the positive news around it and little do we realize the half of the time that news has already been priced in. If we focus on the short term our investments are bound to react to events in the short term both positive and negative. Whereas if we focus on the long term the returns will be impacted less by volatility and more by the performance of the investment instrument.

As per tax laws holding stocks beyond one year is categorized as long term but when it comes to investment an investment horizon of 3 – 4 years or more can be considered as long term. On the other hand when it comes to real estate it is far beyond that. Gold is another asset class but again it depends in which form it is held, whether in physical form as ornaments or in the form of ETFs.

Historical data also shows SENSEX had jumped 250% from April 1991 to March 1992 on the back of Harshad Mehta scam. He took crores of rupees from the banking system and pumped it in the market. The scam came to light when the State Bank of India reported a shortfall in government securities. That led to an investigation which later showed that Mehta had manipulated around Rs 3,500 crore in the system. On August 6, 1992, after the scam was exposed, the markets crashed by 72 percent leading to one of the biggest fall and a bearish phase that lasted for two years.

Similarly, from April 1999 to March 2000 SENSEX rallied 35% on the back of improving macroeconomic scenario – improved GDP numbers from growth in manufacturing, infrastructure and construction sector, falling inflation, healthy forex reserves and good industrial production numbers as against the year before and also the technology bubble was engulfing the rest of the world.

Again SENSEX fell 27% in March 2001 when the Ketan Parekh scam took place. A chartered accountant by training, Parekh came from a family of brokers, which helped him create a trading ring of his own. Be it investment firms, mostly controlled by promoters of listed companies, overseas corporate bodies or cooperative banks, all were ready to hand the money to Parekh, which he used to rig up stock prices by making his interest apparent.

Again in Feb 2008 SENSEX corrected by 8% approx on the day Reliance power Ltd. got listed. It closed 17% below its cost. Sensex witnessed a fall of approx 36% from 2008 to 2009 on the back of US Subprime crisis.

Following that there was a sharp pull back in equities between March 2009 to November 2010 led by global (Quantitative Easing announcement by US) and domestic (general elections) news flow. Putting all the pieces together the message to take away is that events will keep on happening but if one keeps a long term investment horizon it will be a safer bet.

The two main factors to consider before taking an investment decision for one self are ability and willingness. It is very important to know the difference between the two. Willingness is more about the attitude towards risk irrespective of the financial ability to do so. Ability on the other hand is financial capacity to bear the risk. It depends on income of the individual, his savings and expense pattern. It depends on the amount of money which one can keep aside purely for investment and not dip into it time and again for personal needs and can hold on to it even if they are not doing good at a particular point in time.

But again the point to note here is that if a particular investment is consistently a poor performer, one should plan an exit from the same and reinvest it in another suitable option. If one is not very good at deciding which stock to invest in and what the best time to do so is, then there are professionally managed mutual funds with different investment objectives from which one can choose.

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At the outset, thanks for all the responses to our last column on managing money in 2012.  You would recollect that the objective of this column was to address one of the biggest myths about managing money which is that managing money is all about returns on your investment. Whilst returns are no doubt an important component of managing money, we believe it is critical to take a more holistic view on finances. A quick recap on what we have already covered as to do items for quarter 1

January – Put it all together

February – Question what you really want your money to do for you

March –  Keep what matters, let the rest go

April – Plan for emergencies and contingencies – From all of my experience, I have never seen the need for emergency funds come up in a manner where there is a knock on your front door, followed by a polite request to make the money available after 2 months because there will be a need for the funds. Emergencies are exactly what they are ie emergencies and come up when least expected. It could be a medical emergency for yourself or your family, a sudden job loss or the urgent need for money to help a dear friend. It is imperative that these funds are kept away separately for use in an emergency – the amount could vary depending on individual circumstances but typically 3-6 months of contingency expenses are a good idea. These should ideally be kept in a combination of cash at home, a credit card that has a decent credit limit and which has been recently used, savings account linked to fixed deposits which can give you the dual benefit of higher returns and liquidity, and liquid funds that tend to outperform bank fixed deposits especially due to their higher tax efficiency. You could consider using liquid funds with recent innovations in liquid funds that allow you to withdraw cash through ATM cards or redemptions through SMS due to their superior ability to provide access in case of an emergency.

May – Put your risk control mechanisms in place – Ever wondered why cricket teams travel with two wicketkeepers or why they have a captain and a vice captain? Its fairly obvious , isn’t it. So why is it that a large number of us do not have adequate life cover for ourselves, or that our houses are not insured, or that our medical insurance covers are for Rs 2 lakhs when we know that the last acquaintance that got admitted to hospital spent 7 lakhs on his illness. It is therefore critical to evaluate the right amount of life insurance coverage required for oneself and medical cover for your family. Ensure that your house is neither overinsured nor underinsured, and if you are a professional, business owner or key decision maker in your organization, you have insurance covers to protect risks that you are exposed to as a result of your vocation. Since risk mitigation tools are constantly evolving, you may need to seek professional help for this. Also remember that this is not a cost but your Plan B, so treat it like one instead of looking at it as an expense.

June – File your taxes correctly and diligently   Depending on your country of residence and occupation, the dates for filing your tax returns may vary. However, it is critical that you collect all of your data and reports , be it income, investments, interest statements, capital gains, or any others and compile it carefully so that you do not miss out on anything critical. One of the common things that we hear from investors is that we don’t remember whom we issued this cheque to, or I only have a small amount of interest earned on my savings account so why bother filing my returns as my employer is already deducting tax at source. Whilst you are probably correct that a large portion of your taxes are already taken care of, 100% accuracy is critical in this exercise. Just like you dedicate time to other important aspects of your life, you need to make time for this as well, so that it does not come back to haunt you later.

I will endeavour to continue with this calendar over the next few columns as well. I look forward to hearing from you on what you believe is an ideal calendar for the third quarter of 2012. You can write to me with your wishlist on vishal@planaheadindia.com or by leaving your comments.

This article was written by Vishal Dhawan, CFPCM

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There has been a sea change in the expectations that we have from our lives today—whilst we were once happy visiting friends and family at our native place during vacations, today we want holidays to exotic locations overseas.

From the option of having to pick between a Fiat and an Ambassador, we now have 30 new car launches in the next few months to choose from, not to forget the hundreds of models already available, with variants of all kinds. Whilst this explosion of choice has obviously been beneficial, it has also resulted in an increased focus on short term gratification.

Anything that gives us instant pleasure is given precedence over benefits that are likely to accrue over the long term. For example, we have seen a declined focus on saving for retirement because it is so far away amongst people who are younger. In this environment, it is critical to focus on achieving a balance between long-term and short-term financial goals.

So how does one go about achieving this balance?

1. Make a list—Just like a grocery list is recommended when you go to a supermarket to ensure that you don’t overspend, you should list out your financial goals—education for your children, their marriages, asset purchases like homes, and cars, parental support, annual holidays, and, of course, regular day-to-day expenses. List each of your goals clearly.

2. Quantify your goals—A goal without a number is unlikely to get you anywhere.

Different financial goals have different values and can also differ from individual to individual. For example, a retirement in Mumbai could come with very different costs vis-à-vis retirement in Kolkata. It is, therefore, critical to put a number to each of these goals based on your own expectations. Do not forget the impact of inflation on these goals—Rs 40,000 per month that you spend today could be in excess of Rs 2,50,000 in the next 25 years. You may need to seek the help of a financial planner to do this exercise.

3. Rank the goals in order of importance—Remember, your neighbour’s financial goals are not yours. Your neighbour’s shining new car should not suddenly result in a situation where your most important financial goal is a new car purchase. You will probably find that achieving all your goals may not be possible, so a process of prioritisation may need to be undertaken. Try to achieve a balance between short-term and long-term goals. Too often excessive focus on short-term goals or any one of the goals tends to compromise your overall financial wellbeing. For example, overstretching yourself on your residential home purchase could result in a compromise of your child’s education or your own retirement.

4. Manage the risks—Current lifestyles could expose you to health risks, life-threatening or otherwise. Ensure that you have adequate life and health cover to insure your risks. Buying them early increases the chances of getting them cheaper as well as when you are in a good state of health. The gap between needs and funds can always be funded by insurance.

5. Diversify your portfolio—Use a combination of financial instruments—stocks/equity, mutual funds, bonds, precious metals, real estate and bank deposits in line with your financial goal requirements and risk appetite. The products that you buy should be aligned to deliver to your financial goals; for e.g., avoid buying equity for a short-term financial goal where you are likely to need the money in a year as equities can be very volatile over short periods. Similarly, using a 100 per cent fixed income portfolio, though very safe, can result in your portfolio value not being able to match up with inflation.

6. Put the plan into action—Ensure that you start saving towards your financial goals diligently. There is a tendency to put off the implementation of the plans and then try to make up lost time by investing too aggressively. This may not be an appropriate strategy.

7. Monitor your portfolio regularly—It is extremely critical to monitor your portfolio and financial plan annually. There is a high probability that some of the financial goals change along the way and your financial plan may need mid-course correction. However, be careful that you don’t check your portfolio each day, as that could do you more harm than good.

“The trick to juggling is determining which balls are made of rubber and which ones are made of glass.”

This article was written by Vishal Dhawan, CFPCM and appeared in theEXIM INDIA newsletter  on 15th July 2011 .

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