Author: Sanjeev Govila

13 Aug 2011
Retirement funds investment for Defense, army army Officers,

RETIRE RICH, LIVE COMFORTABLY IN YOUR GOLDEN YEARS

Guaranteed pension, assured returns from government schemes, relatively low inflation and the security of a joint family – all the four pillars on which has previous generation’s retirement planning rested, have either gone or will disappear soon. Tomorrow’s retirees will balance high income with uncertain returns, better means of capital appreciation with longer lifespan, and all new earning and career options with an urge to hang up their boots early. And all this, without wanting to compromise on their lifestyle.

The other big challenge for retires comes from an enemy that is both stealthy and relentless – inflation. Just as compounding works to grow your corpus, inflation eats away at its value. The sum of Rs 1 crore may seem like a lot of money today but over 30 years, an inflation of 8% can reduce its equivalent purchasing value to less than Rs 10 lakhs of today!! And to think that consumer-level inflation today actually is in double digits. A low-to-moderate inflation rate of 7-8% does not attract attention of the working class. That’s because incomes prices of products and services do not seem to be shooting up ‘fast’ but it nevertheless erodes your money-value ever so quietly!

Dangers of Living Long Only on Govt Pension

Let’s take the example of a Colonel who retires at the age of 54 in June 2011. He will get a pension of approx Rs 26,000 pm after tax (assuming 50% commutation of pension) which grows by approx 5% per annum due to the DA component. We assume that his household expenses are Rs 25,000 pm which increases with inflation at approx 8%. The calculation further assumes he has no other liability and lives in his own house. A very preliminary calculation shows that, if he is dependent only on his pension for his living, then, due to this difference of 3% in the growth rates of his pension and inflation, his pension will fall short of his expenses by Rs 1394 per month after 3 years. This figure will shoot up to Rs 9641 per month 9 years after retirement, Rs 25252 pm 15 years after retirement and Rs 83166 pm 25 years after retirement. Remember, since we live well and maintain ourselves well, our life expectancy is comfortably at 85 years of age – ie, we will live more than 30 years after our retirement!!

And in case somebody feels that he has approx Rs 50 lakh corpus of retirement benefits which will help him live well, calculations again show that if he invests this sum at 8% per annum in very safe investment avenues and gets the returns, he will start eating into this corpus from the age of 66 years (ie just 12 years after retirement) and by the age of 80 years (ie 27 years after retirement), there will be no corpus left! Also remember that we are only talking about normal day-to-day living, no big purchases – not even change of a car ever or gifts for children / grand-children or holidays or repayment of a home loan. And if inflation goes into double digits as it is today, heavens will surely fall!

So it is clear that inflation eats away your entire guaranteed pension. There is a significant gap between the income and expenses and this gap can create a serious problem in future. It is advisable to invest adequate a disciplined amount regularly in some high growth investment avenues while you are serving, which generates high return that will not only support your expenses after you stop earning but will help you pursue your dreams post-retirement.

Follow this four-step retirement strategy to build up a healthy nest-egg:-

  • Know how much you need

The income that you would need to live off on after retirement is approximately 65-70% of the income that you live off on while working, considering no big purchases or expenditures. However, this rule of thumb may not be accurate for everybody since people are living longer than ever and retiring in good enough health to incur additional expenses (travel, entertainment, and so on). This estimate applies if your situation fits the following criteria:

  • Your house will be paid off (no rent/loan).
  • No work-related expenses (commuting, changing of clothes frequently, shifting, etc).
  • Your children will be financially independent.
  • Fewer taxes because of lower income and No debt of any sort.
  • Decide your asset allocation

Don’t pull all your nest eggs in one basket. That’s too risky a strategy for something as important as retirement. The nest egg should be a mix of different asset classes and investment instruments. Equities offer a distinct advantage because they can deliver significantly higher returns than other investment over the long term. Investors whose retirement is 20-25 years away should ideally park their investment in equity mutual funds. For older investors in their 40s and 50s, a larger allocation to debt is advisable. However, this is a generalized statement and finally, everything depends on your risk attitude and aptitude (calculate your Risk Aptitude from the calculator on our website www.humfauji.com).

  • Choose appropriate products

Once you have decided your asset allocation, choose the investment vehicles that will take you to your destination. Instead of investing in a single scheme, do so in a bunch of instruments, which not only assure regular income but also allow your corpus to grow in tandem with your withdrawals and rising inflation. This strategy should alter with the age or stage of the life after retirement. So, for the first 6-8 years after you retire, allow your funds to grow at faster rate than the withdrawal. Even as you use the interest earned through debt options to meet your expenses, invest in equity through mutual funds or monthly income plans. However, the crux of all investment remains a very aggressive monitoring after you have parked your funds in them.

  • Formulate a withdrawal plan

The final step in your retirement planning is to formulate a withdrawal strategy. Your retirement portfolio must have two essential components: liquidity and growth. It should provide you regular income and also grow fast enough to take care of future expenses. Systematic  Withdrawal Plans (SWP) options of the Mutual Funds and rentals from a good residential / commercial property are ideal in this regard.

 

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06 Aug 2011
FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS

FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS Part-2

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s marriage, property or seed capital for a business venture for your child, the approach given here holds good.

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-literate, maybe ill-intentioned, insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of financial planning for own self far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

We take the case of three families who need to plan for their young child’s college 15 years away. Taking today’s College costs to be approx Rs 2.5 Lakhs per year (implying 10 Lakhs for 4 years’ Engineering), with a 6% yearly inflation, it comes to Rs 23.96 Lakhs 15 years later. If the three families put in, say, Rs 1 Lakh today and then decide to pursue different methods of accumulating the balance money for their child, the results could be drastically different. A parent (Parent A), who is willing to take higher risk, would ideally be compensated by a higher return over long term – the portfolio will have a higher concentration of assets like equity mutual funds. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme could be a risk-averse parent (Parent C), who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). He can hope for a return of approx 8% per year. The third parent (Parent B) could take a middle path and have a cautious dabbling of ‘fully safe’ and some equity-oriented flavour. He/she could hope for about 10% per annum return. When we look at what they require to accumulate over a period of time, the results could be as follows:-

 

Parent A                              Parent B                               Parent C

 

Value of initial Rs 1 Lakh after 15 years                   8,13,706                               4,17,724                               3,17,216

Therefore, net balance to be accumulated           15,82,294                             19,78,276                             20,78,783

 

This balance money requires:

Yearly savings of                                                               95904                                    1,23,768                               1,31,748

OR monthly savings of                                                   7992                                       10,314                                   10,979

OR one-time accumulation of                                     1,69,114                               4,44,165                               6,28,615

* Includes combined fee and monies for living, for Engineering from a rated institute in India.

 

Coming to the solution, the first number that hits you in the table above is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with some risk appetite, the money that needs to be set aside every month is just Rs 7,992!

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective: Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a definite plan in place for each objective, to allocate resources accordingly and most importantly, follow it through and through with discipline.
  • Engage the services of a financial planner, if not confident yourself: The importance of engaging the services of an expert and qualified financial planner cannot be overstated. He would make out a balanced portfolio for you to meet your goal and, if he offers those services, may even monitor its progress over its life-time. However, it pays to be actively involved in the entire financial planning activity.

Don’ts of Planning

  • Don’t delay the investment activity: Starting early will enable parents to gain from the “power of compounding”. In the example given above, if Parent A, who is taking more risk, starts say 5 years later. He would only accumulate Rs 4,47,819 from his initial Rs 1 Lakh investment and would require Rs 1,82,806 per annum OR Rs 12377 per month or a lump-sum accumulation of Rs 3,91,118 to get the required money for his child. The substantial difference seen above can be attributed to the fact that earlier, he had longer investment tenure and hence could enjoy the benefits of compounding. The message is simple: it pays to start early!
  • Don’t dip into your child’s portfolio: Resist the temptation to utilise the monies that have been set aside for the child’s future needs, for your present consumption.

Way Forward

Just common-sense, perseverance and correct identification of objectives is actually all that you require to fulfil your obligations of a parent. It is very important to be proactive, avoid drift and identify the investment avenues that you are comfortable with. But do what you may, please start early – maybe even before the child is born!!

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s marriage, property or seed capital for a business venture for your child, the approach given here holds good.

 

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-literate, maybe ill-intentioned, insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of financial planning for own self far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may.

 

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

 

We take the case of three families who need to plan for their young child’s college 15 years away. Taking today’s College costs to be approx Rs 2.5 Lakhs per year (implying 10 Lakhs for 4 years’ Engineering), with a 6% yearly inflation, it comes to Rs 23.96 Lakhs 15 years later. If the three families put in, say, Rs 1 Lakh today and then decide to pursue different methods of accumulating the balance money for their child, the results could be drastically different. A parent (Parent A), who is willing to take higher risk, would ideally be compensated by a higher return over long term – the portfolio will have a higher concentration of assets like equity mutual funds. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme could be a risk-averse parent (Parent C), who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). He can hope for a return of approx 8% per year. The third parent (Parent B) could take a middle path and have a cautious dabbling of ‘fully safe’ and some equity-oriented flavour. He/she could hope for about 10% per annum return. When we look at what they require to accumulate over a period of time, the results could be as follows:-

 

Parent A    Parent B    Parent C

 

Value of initial Rs 1 Lakh after 15 years      8,13,706      4,17,724      3,17,216

Therefore, net balance to be accumulated 15,82,294    19,78,276     20,78,783

 

This balance money requires:

Yearly savings of                                          95,904       1,23,768      1,31,748

OR monthly savings of                                    7992          10,314          10,979

OR one-time accumulation of                    1,69,114       4,44,165      6,28,615

* Includes combined fee and monies for living, for Engineering from a rated institute in India.

 

Coming to the solution, the first number that hits you in the table above is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with some risk appetite, the money that needs to be set aside every month is just Rs 7,992!

 

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective: Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a definite plan in place for each objective, to allocate resources accordingly and most importantly, follow it through and through with discipline.
  • Engage the services of a financial planner, if not confident yourself: The importance of engaging the services of an expert and qualified financial planner cannot be overstated. He would make out a balanced portfolio for you to meet your goal and, if he offers those services, may even monitor its progress over its life-time. However, it pays to be actively involved in the entire financial planning activity.

 

Don’ts of Planning

  • Don’t delay the investment activity: Starting early will enable parents to gain from the “power of compounding”. In the example given above, if Parent A, who is taking more risk, starts say 5 years later. He would only accumulate Rs 4,47,819 from his initial Rs 1 Lakh investment and would require Rs 1,82,806 per annum OR Rs 12377 per month or a lump-sum accumulation of Rs 3,91,118 to get the required money for his child. The substantial difference seen above can be attributed to the fact that earlier, he had longer investment tenure and hence could enjoy the benefits of compounding. The message is simple: it pays to start early!
  • Don’t dip into your child’s portfolio: Resist the temptation to utilise the monies that have been set aside for the child’s future needs, for your present consumption.

 

Way Forward

Just common-sense, perseverance and correct identification of objectives is actually all that you require to fulfil your obligations of a parent. It is very important to be proactive, avoid drift and identify the investment avenues that you are comfortable with. But do what you may, please start early – maybe even before the child is born!!

Basic Mantras of Saving Money

Save at least 30-35 per cent of your monthly income in good quality savings instruments.

Keep at least 3 months of your monthly income for emergencies. Alternately, get a good credit card.

Clear all your high interest debts first out of the savings that you make.

And, the Basic Mantras of Making Money

The sooner the better. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on your savings. The earlier you start investing and continue to do so consistently, the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow. Research and history indicates these three golden rules for all investors:-

1. Invest early.

      2. Invest regularly.

      3. Invest for long term and not short term.

Research and history also indicates these four common investment mistakes:-

1. Investing without a plan.

     2. Not diversifying well enough.

     3. Ignoring risk.

     4. Getting married to your investments.

 IN A NUTSHELL

♠  Inflation, i.e. a rise in the general price level, is one of the major factors that necessitate financial planning.

♠   Financial planning aids individuals upgrade and maintain their lifestyles as also helps meet contingencies.

♠   Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.

♠  When faced with multiple objectives, prioritise and start off with the most pressing one.

♠  Start early and make up for any deficit at a later stage. Don’t delay the investment process on account of small shortage of funds.

♠   Always evaluate the risk in an investment opportunity before the return. Invest in line with your risk appetite, not the expected return.

♠   Market linked investments like equities get less risky with the passage of time. In fact, Mutual Funds investing in Equity (shares) are the least risky if investment horizon is beyond 5 years!!

♠   Risk is a very personal thing; there is no formula to calculate it.

♠   Often at an advanced age, risk appetite declines.

 

I have tried to include a large amount of tips in this small article, due to space constraints and reader-fatigue considerations. Any specific queries or advice can be sent to me on my email ID contactus@humfauji.in  or on tele 0 – 9999 022 033 / 011-4054 5977.

 

11 Mar 2011
FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS Part-1

FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS Part-1

Alice                      :               Which road is the right one to take?

Cheshire Cat      :               Depends on where you want to go.

Alice                      :               I do not know!

Cheshire Cat      :               Then any road will get you there!

                                                                                                                – Alice in Wonderland

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s education, marriage, property or seed capital for a business venture for your child, the approach given here holds good. The key lies in identifying each objective that you wish to provide for in an unambiguous manner and then quantifying it. While planning for your child’s future, there are some thumb rules that you should bear in mind which are given as a list of do’s and don’ts later in this article.

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-educated insurance agent available, if at all; the stress and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of own planning far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may. After all, the duty towards our families has to take a priority somewhere high up on the scale.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is a much personalised activity. It will work best for you only if there is customisation to suit your exact needs and profile. Also to be noted is the fact that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

The table below compares investment strategies followed by three parents as per their risk profiles. The point to see is that, the parent, who is willing to take higher risk, would ideally be compensated by a higher return – the portfolio will have a higher concentration of risky assets like equity mutual funds or Unit linked Insurance Plans (ULIPs) with high equity exposure. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme is a risk-averse parent, who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). Alternatively one can invest in mutual funds and ULIPs, which invest in Government of India debt instruments. A portfolio of these schemes will normally earn a return of about 5.5% CAGR over the investment horizon. The parent with a moderate risk appetite should have a combination of risky and less risky assets. We have assumed that a moderate risk portfolio can yield about 12% CAGR.

 

  Case 1 Aggressive Case 2

 Moderate

Case 3

Risk Averse

Cost of College Education today* Rs 5,00,000 5,00,000 5,00,000
Time to College yrs 15 15 15
Expected inflation in fee % 10 10 10
Expected Future Cost of College Education Rs 20,88,624 20,88,624 20,88,624
Money already set aside Rs 1,00,000 1,00,000 1,00,000
Expected growth of assets (Post tax) % 15.0 11.5 5.5
Value of existing assets at the time of need Rs 8,13,706 5,11,826 2,23,247
Therefore, net to be accumulated Rs 12,74,918 15,76,798 18,65,377
Solution
Monies to be accumulated… Rs 12,74,918 15,76,798 18,65,377
Annual Saving of Rs 43,897 58,323 93,206
Or Monthly investments of Rs 3,658 4,860 7,767
Or a one-time investment of Rs 2,56,680 4,08,072 9,35,564

* Includes combined fee and monies for living, for Engineering and an MBA course from a rated institute in India. Tax rate assumed at 30% plus applicable surcharge.

Another factor that a parent needs to keep in mind is that any solution, where all the money is invested in one asset class, is not an advisable proposition. Coming to the solution, the first number that hits you in the table is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with a high risk appetite, the money that needs to be set aside every month is just Rs 3,658!

Mutual Funds for Your Child

The good news for parents is that there is common ground between their objectives and the objectives of child fund schemes of mutual funds. Child funds are launched with the explicit objective of helping parents build a corpus. Sample this – one of Mutual Fund company’s Children Career Plan’s investment objective reads – ‘to provide children, after they attain the age of 18 years, a means to receive scholarship to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enabling them to set up a home or finance the cost of other social obligations.’

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a distinct plan in place for each objective and to allocate resources accordingly.
  • Engage the services of a financial planner, if not confident yourself The importance of engaging the services of an expert and qualified financial planner cannot be overstated. It pays to be actively involved in the entire financial planning activity. Your participation will not only ensure that you are unambiguously aware of how your portfolio is progressing; it will also keep the financial planner on his toes.

Don’ts of Planning

  • Don’t delay the investment activity Starting early will enable parents to gain from the “power of compounding”. Say families X and Y are planning to create a corpus that will provide for their respective children’s education expenses 20 years from now. Family X, being the more proactive of the two, starts investing Rs 10,000 every year. Family Y starts the investment process after 10 years. However, to make up for the lost time, family Y decided to double the investment amount i.e. they invest Rs 20,000 per annum for a 10-yr period.
  Family X Family Y
Amount invested (Rs per annum) 10,000 20,000
Tenure of investment (years) 20 10
Returns (% per annum) 8 8
Maturity amount (Rs) 457,620 289,740

The substantial difference seen above can be attributed to the fact that family X had longer investment tenure and hence could enjoy the benefits of compounding. Family Y failed to match the corpus accumulated by family X, despite having doubled the investment amount. The message is simple: it pays to start early!

  • Don’t dip into your child’s portfolio Resist the temptation to utilise the monies that have been set aside for the child’s future needs, for your present consumption.

How to Teach Children the Value of Money

It is unlikely that a kid will learn to manage her money until she formally takes up a career in finance. Here is what you can do in your own little way to ensure that your kid isn’t completely at sea when it comes to managing her money.

It’s never too early to start : Explain the benefits of saving money over time, and how it can provide them with the power of buying something in the future that may be well beyond their means today. Introduce them to the concept of monetary ‘limitations’ and how saving is the best way to avoid them.

Who makes money? : In every child’s head, parents are a sort of discretionary mint that decides when to grant some money and when not to. Explain the concept of ‘salary’ to them by giving them a nominal monthly allowance. Keep a tab on their weekly expenses, and let them learn their own lessons.

Show them how saving can be fun : Tell them how they will not have to pine for their favourite toy anymore, once they start saving money. Basically make them truly appreciate the merits of saving and financial planning.

Banking is an experience; let them feel it: Take your child to the bank. As soon as possible, get an account opened in their name, where they can personally experience banking.

Inculcate good shopping habits : Kids are very observant; they catch on to the smallest of habits and attitudes. If you are an impulse shopper, make sure you do not overindulge yourself in front of your children. As often as possible, make large or expensive purchases seem deliberate and planned. Rationalise purchases in their presence so that they understand the usefulness of it.

Basic Mantras of Saving Money

Save at least 30-35 per cent of your monthly income in good quality savings instruments.

Keep at least 3 months of your monthly income for emergencies. Alternately, get a good credit card.

Clear all your high interest debts first out of the savings that you make.

And, the Basic Mantras of Making Money

The sooner the better. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on your savings. The earlier you start investing and continue to do so consistently, the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow. Research and history indicates these three golden rules for all investors:-

      1. Invest early.

      2. Invest regularly.

      3. Invest for long term and not short term.

Research and history also indicates these four common investment mistakes:-

     1. Investing without a plan.

     2. Not diversifying well enough.

     3. Ignoring risk.

     4. Getting married to your investments.

 IN A NUTSHELL

♠  Inflation, i.e. a rise in the general price level, is one of the major factors that necessitate financial planning.

♠   Financial planning aids individuals upgrade and maintain their lifestyles as also helps meet contingencies.

♠   Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.

♠  When faced with multiple objectives, prioritise and start off with the most pressing one.

♠  Start early and make up for any deficit at a later stage. Don’t delay the investment process on account of small shortage of funds.

♠   Always evaluate the risk in an investment opportunity before the return. Invest in line with your risk appetite, not the expected return.

♠   Market linked investments like equities get less risky with the passage of time. In fact, Mutual Funds investing in Equity (shares) are the least risky if investment horizon is beyond 5 years!!

♠   Risk is a very personal thing; there is no formula to calculate it.

♠   Often at an advanced age, risk appetite declines.

I have tried to include a large amount of tips in this small article, due to space constraints and reader-fatigue considerations. Any specific queries or advice can be sent to me on my email ID contactus@humfauji.in or on tele 0 – 9999 022 033 / 011-4054 5977.

03 Oct 2010
FINANCIAL PLANNING FOR THEIR CHILDREN BY INFANTRY OFFICERS.

FINANCIAL PLANNING FOR THEIR CHILDREN BY INFANTRY OFFICERS.

Alice                      :               Which road is the right one to take?

Cheshire Cat      :               Depends on where you want to go?

Alice                      :               I do not know!

Cheshire Cat      :               Then any road will get you there!

                                                                                                                – Alice in Wonderland

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s marriage, property or seed capital for a business venture for your child, the approach given here holds good. The key lies in identifying each objective that you wish to provide for in an unambiguous manner and then quantifying it. While planning for your child’s future, there are some thumb rules that you should bear in mind which are given as a list of do’s and don’ts later in this article.

Why is this exercise more strenuous for Infantry Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-educated insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc etc. All these issues combine to make a potion which keeps any thoughts of own planning far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may. After all, the duty towards our families has to take a priority somewhere high up on the scale.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is a much personalised activity. It will work best for you only if there is customisation to suit your exact needs and profile. Also to be noted is the fact that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

The table below compares investment strategies followed by three parents as per their risk profiles. The point to see is that, the parent, who is willing to take higher risk, would ideally be compensated by a higher return – the portfolio will have a higher concentration of risky assets like equity mutual funds or Unit linked Insurance Plans (ULIPs) with high equity exposure. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme is a risk-averse parent, who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). Alternatively one can invest in mutual funds and ULIPs, which invest in Government of India debt instruments. A portfolio of these schemes will normally earn a return of about 5.5% Compounded Annual Growth Rate (CAGR) over the investment horizon. The parent with a moderate risk appetite should have a combination of risky and less risky assets. We have assumed that a moderate risk portfolio can yield about 12% CAGR.

  Case 1 Aggressive Case 2

 Moderate

Case 3

Risk Averse

Cost of College Education today* Rs 5,00,000 5,00,000 5,00,000
Time to College yrs 15 15 15
Expected inflation in fee % 10 10 10
Expected Future Cost of College Education Rs 20,88,624 20,88,624 20,88,624
Money already set aside Rs 1,00,000 1,00,000 1,00,000
Expected growth of assets (Post tax) % 15.0 11.5 5.5
Value of existing assets at the time of need Rs 8,13,706 5,11,826 2,23,247
Therefore, net to be accumulated Rs 12,74,918 15,76,798 18,65,377
Solution
Monies to be accumulated… Rs 12,74,918 15,76,798 18,65,377
Annual Saving of Rs 43,897 58,323 93,206
Or Monthly investments of Rs 3,658 4,860 7,767
Or a one-time investment of Rs 2,56,680 4,08,072 9,35,564

* Includes combined fee and monies for living, for Engineering and an MBA course from a rated institute in India. Tax rate assumed at 30% plus applicable surcharge.

Another factor that a parent needs to keep in mind is that any solution, where all the money is invested in one asset class, is not an advisable proposition. Coming to the solution, the first number that hits you in the table is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with a high risk appetite, the money that needs to be set aside every month is just Rs 3,658!

 

Mutual Funds for Your Child

The good news for parents is that there is common ground between their objectives and the objectives of child fund schemes of mutual funds. Child funds are launched with the explicit objective of helping parents build a corpus. Sample this – one of Mutual Fund company’s Children Career Plan’s investment objective reads – ‘to provide children, after they attain the age of 18 years, a means to receive scholarship to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enabling them to set up a home or finance the cost of other social obligations.’

 

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a distinct plan in place for each objective and to allocate resources accordingly.
  • Engage the services of a financial planner, if not confident yourself The importance of engaging the services of an expert and qualified financial planner cannot be overstated. It pays to be actively involved in the entire financial planning activity. Your participation will not only ensure that you are unambiguously aware of how your portfolio is progressing; it will also keep the financial planner on his toes.

 

Don’ts of Planning

  • Don’t delay the investment activity Starting early will enable parents to gain from the “power of compounding”. Say families X and Y are planning to create a corpus that will provide for their respective children’s education expenses 20 years from now. Family X, being the more proactive of the two, starts investing Rs 10,000 every year. Family Y starts the investment process after 10 years. However, to make up for the lost time, family Y decided to double the investment amount i.e. they invest Rs 20,000 per annum for a 10-yr period.
  Family X Family Y
Amount invested (Rs per annum) 10,000 20,000
Tenure of investment (years) 20 10
Returns (% per annum) 8 8
Maturity amount (Rs) 457,620 289,740

The substantial difference seen above can be attributed to the fact that family X had longer investment tenure and hence could enjoy the benefits of compounding. Family Y failed to match the corpus accumulated by family X, despite having doubled the investment amount. The message is simple: it pays to start early!

  • Don’t dip into your child’s portfolio Resist the temptation to utilise the monies that have been set aside for the child’s future needs, for your present consumption.

 

How to Teach Children the Value of Money

It is unlikely that a kid will learn to manage her money until she formally takes up a career in finance. Here is what you can do in your own little way to ensure that your kid isn’t completely at sea when it comes to managing her money.

It’s never too early to start          Explain the benefits of saving money over time, and how it can provide them with the power of buying something in the future that may be well beyond their means today. Introduce them to the concept of monetary ‘limitations’ and how saving is the best way to avoid them.

Who makes money?      In every child’s head, parents are a sort of discretionary mint that decides when to grant some money and when not to. Explain the concept of ‘salary’ to them by giving them a nominal monthly allowance. Keep a tab on their weekly expenses, and let them learn their own lessons.

Show them how saving can be fun          Tell them how they will not have to pine for their favourite toy anymore, once they start saving money. Basically make them truly appreciate the merits of saving and financial planning.

Banking is an experience; let them feel it            Take your child to the bank. As soon as possible, get an account opened in their name, where they can personally experience banking.

Inculcate good shopping habits                Kids are very observant; they catch on to the smallest of habits and attitudes. If you are an impulse shopper, make sure you do not overindulge yourself in front of your children. As often as possible, make large or expensive purchases seem deliberate and planned. Rationalise purchases in their presence so that they understand the usefulness of it.

Basic Mantras of Saving Money

Save at least 30-35 per cent of your monthly income in good quality savings instruments.

Keep at least 3 months of your monthly income for emergencies. Alternately, get a good credit card.

Clear all your high interest debts first out of the savings that you make.

And, the Basic Mantras of Making Money

The sooner the better. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on your savings. The earlier you start investing and continue to do so consistently, the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow. Research and history indicates these three golden rules for all investors:-

1. Invest early.

      2. Invest regularly.

      3. Invest for long term and not short term.

Research and history also indicates these four common investment mistakes:-

1. Investing without a plan.

     2. Not diversifying well enough.

     3. Ignoring risk.

     4. Getting married to your investments.

 IN A NUTSHELL

♠  Inflation, i.e. a rise in the general price level, is one of the major factors that necessitate financial planning.

♠   Financial planning aids individuals upgrade and maintain their lifestyles as also helps meet contingencies.

♠   Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.

♠  When faced with multiple objectives, prioritise and start off with the most pressing one.

♠  Start early and make up for any deficit at a later stage. Don’t delay the investment process on account of small shortage of funds.

♠   Always evaluate the risk in an investment opportunity before the return. Invest in line with your risk appetite, not the expected return.

♠   Market linked investments like equities get less risky with the passage of time. In fact, Mutual Funds investing in Equity (shares) are the least risky if investment horizon is beyond 5 years!!

♠   Risk is a very personal thing; there is no formula to calculate it.

♠   Often at an advanced age, risk appetite declines.

I have tried to include a large amount of tips in this small article, due to space constraints and reader-fatigue considerations. Any specific queries or advice can be sent to me on my email ID contactus@humfauji.com or humfauji@hotmail.com or on tele 0 – 9999 022 033 / 011-4054 5977.