They are the love of our lives and as someone famous once said, they are actually our hearts walking outside our bodies. Yes, we're talking about our children- and with 14th November round the corner, today is a special dedicated to making the future of our little ones financially more secure.
We work, we save, we dream- about our kids' future. It will just take the next 30 minutes to put you on track with making these dreams come true. So stay with us to find out how.
We may wear western clothes, enjoy burgers and pizzas and even celebrate halloween, but when it comes to being a parent, we are still very proudly, very Indian. None of that detached western outlook towards kids has touched us. Here we worry about their health, their safety, their well being and dream big dreams along with them. For all you parents out there watching the show, saving for your kids is already a big priority; so are you on the right track and where do you start? I guess at the very beginning.
The best way is to make your saving goal linked. And however much you may disagree today, the two big goals in front of you are:
# Education
# Marriage
Though education is something that the contemporary parents look at as a goal, most of us balk at the thought of spending on their marriages. But if you are spending on their birthdays, you will end up spending on their marriages. The good thing is that these two goals are at least 10 years away for most of us, just enough time to get that stash in place.
Two things you need for both goals:
# Get a cost estimate today of what it costs. Suppose an MBA course costs Rs 10 lakh today.
# Double it for 10 years hence and almost triple it for 15 years hence.
Now we have clear goals in front of us: Rs 50 lakh in 15 years. It's easy to work towards a goal that you can see.
First we bring up numbers which will give you a clear indication on where education expenses are going?
The Cost of Private Education taking 7 per cent inflation is:
MBA (2 yr)
# Now Rs 4 -10 Lakh
# In 10 years Rs 8 - 20 lakh
# In 15 yeer as Rs 11 to 27 lakh
MBBS (5-yr)
# Now Rs 15-25 lakh
# In 10 years - from 30 to 49 lakhs
# In 15 years making your child a doctor could cost you anywhere between 40 to almost 70 lakhs
Engineering (4-yr, B.Tech)
# Rs 4 to10 lakh now in 10 years it doubles to
# Rs 8 to 20 lakh
# Rs 11 to 27 in 15 years
Hospitality (3-yr)
# Now 3-6 lakhs rupees today
# This will double to 6-12 lakhs in 10 years
# And will cost up to 16 lakhs in 15years
More and more people are considering foreign education for their kids simply because there aren’t enough good institutions in the country and even abroad scholarships are not that easy any more; so perhaps you might want to prepare to fund a lot more expensive education.
A 2 year full time MBA is US today in a good institution can cost up to Rs 45 lakh; in 15 years this amount doubles to over a crore of rupees. That's a lot of money. Of course US is the most expensive.
Take UK for instance; it is around Rs 30 lakh today and Rs 85 lakh in 15 years.
Australia comes next in line on education expenses- about Rs18 lakh today and half a crore in 15 years; and a Canadian MBA will cost about Ra 20 lakh today and a little more than half a crore in 15 years.
An Engineering (Bachelor's degree, 4-yr, full time) course- now in USA would be Rs 38 lakh to Rs 1 crore. In the UK, now it would be Rs 36 lakh to Rs 99 lakh. In Australia it would be Rs 21 lakh to Rs 58 lakh. In Canada it would be Rs 20 lakh to Rs 55 lakh.
At 7 per cent inflation the above is the average cost of best universities. And that looks like a lot of money! But did you know what difference just 5 years will make in what you need to save each month?
Let’s suppose you need Rs 50 lakh 10 years from now. Well, you need to invest Rs 25,000 a month in a product that returns 12 per cent annually.
Now suppose your child is 3 years old and you have 15 years to save the money. Your monthly saving target now drops by more than half to Rs 10,000.
Regular amounts saved and invested in a low cost product will get you to your goal safely.
SECURE YOUR CHILD
Invest regularly
# Start SIPs, FDs, kids' plans specifically for your child
# Don't withdraw or break payments to cater to another need
# Go heavy on equity if children are small. If you have a kids' plan from an insurance company ask them to move you to a full equity allocation.
# Reduce equity and increase debt as they grow older. You can do this in a kid's plan too.
# Include gold to diversify and for marriage. We will all make gold jewellery when our brats tie the knot.
Once you have this investing regime totally internalised, we can now talk about how to make an asset allocation to deploy the money. Go heavy on equity when the child is small and you have a long investing period ahead of you but begin to move to debt as the date of the goal comes nearer. Let’s look at some asset allocations:
SECURE YOUR CHILD
# Till age 10: 80 per cent equity, 15 per cent debt, 5 per cent gold. You have time on your side so you can go heavy on equity. Be aggressive and put 80 per cent into a pure equity product.
# Age 10-12: 75 per cent equity, 20 per cent debt, 5 per cent gold. Bump up the debt component a bit more since the goal is now a little closer.
# Age 13-15: 65 per cent equity, 30 per cent debt, 5 per cent gold. You are just 5-8 years away from the goal and the risk of hitting a bear market just as you need the money is getting higher. So you need a larger exposure to a product like a PPF or a bank FD.
What are the products you can buy as equity towards your kid's fund?
Start with putting money in Nifty BeES; that's a large cap index fund and mirrors the index movement closely and also has the lowest costs.
DSP ML, now Blackrock Equity, has a diversified equity fund, has emerged tops in the new OLM fund list; opt for an SIP in that.
DSP ML Tiger, a thematic equity fund- you can put aside a small SIP in this.
Reliance Diversified Power, which is a sector fund with a higher risk, here returns could be very high too. So out of your entire equity allocation, perhaps 5 per cent could go there.
But before you even start investing you need to protect your child from any possible mishap to you. So, insurance- you must first use insurance to protect the child. Here’s how:
# Ensure earning members are adequately insured
# Go for term insurance
# Your insurance cover should be at least 7-10 times your annual income
Also, buy mediclaim:
# Over and above the employers' plan
# Buy a family floater of at least Rs 2 to 5 lakh
But if you are ok with the above constraints and do like the regular saving regimen that a kid's policy puts you in here are some things that you can look at before you buy a kids' plan.
Child-friendly plans
# Parent is the life assured. The child adds NO economic value to the household. We do NOT insure the life of the child, but the life of the parent.
# Waiver of premium' rider included. If the parent dies, the insurance company will continue the premiums so that the policy continues. This is relevant if you already have a policy that has the child as the insured person. Ask your insurance company to add this rider now.
# Money is guaranteed at a certain age. Make sure that you are getting a minimum guaranteed return at the age that you think the child will be ready for higher studies or marriage.
# Policy continues even after demise of policyholder. You do not want a policy that ends with your death, leaving a large amount of cash in the hands of the guardian. Better to defer the payout till the child is old enough to need it and take care of the money.
2 policies which have the above features:
Sunil Dhawan, the insurance expert at OLM has two polices that he likes:
# HDFC Young Star
# Max New York Life Smart Steps
He says that apart from the above four features that are common to all other kids' plans in the market, these two score since they have lower annual charges at 1.25 per cent as against 1.75 per cent for other plans.
We've covered a lot of ground but if there are 3 absolute basic things you need to keep in mind to keep your kids safe, here are the very essentials from ICICI direct:
# Start planning and saving for events such as college education and marriage expenses when children are born.
# Investing in an insurance plan for your child will ensure that your child's education will not suffer due to any unfortunate circumstances.
# Remember that starting early is the key. The power of compounding will help your child have access to larger funds in future.
To end with, is there a medical insurance that covers new born babies? The insurance companies do not cover a new born yet, since the life of a new born is considered unstable from the insurance point of view. The earliest you can buy a policy is when the child is three months old. Three plans for you to consider:
# Apollo DKV is a stand alone health insurance company. It looks as if it is cheapest today as it offers a family floater plan of Rs 2 lakh for two parents and a child for Rs 4,700 a year
# ICICI Lombard is next at Rs 5,200
# Bajaj Allianz at Rs 7,000 looks expensive