Planning for your child's bright future?

Every single one of us feels that if we have brought forth a child into this world, it is our foremost duty to provide the best opportunities that we possibly can!

Nowadays, India is waking up to another good realisation: to save for the retirement, girl child's wedding and son's education - is passe!

Now we treat, or most of us do, the girl child's education with equal importance as the male child's.

Shame shame to the selfish parent who thinks a girl is a responsibility to wash hands off by wedding her 'off' to a nice boy, laden with gold, dowry and gifts!

Kudos to the new age parent who thinks that if after providing for the best education, health care and well being of all his/her children (male or female!), if anything is left for their weddings (priority should be his own financial security after duties done!), well and good!

Like-minded people will like to share the article I read and have posted below.

Happy reading!

Providing for a child's education

Providing for a child's education is increasingly emerging as a priority with parents. And rightly so! Not too long ago, parents could easily manage to provide their children with quality education from their savings and income streams. However with the cost of education spiraling sharply, it can no longer be treated as an incidental expense. Now, there exists a definite need to consider education as a significant expenditure that should be intentionally planned and provided for.

Planning for an MBA degree

Child's Monthly Lumpsum Investment Age (Yrs) Investment(Rs) (Rs.) Cash Outflow Rate of Return(%)
3 3,496 (Rs.) 15.0
4 3,496 15.0
5 3,496 15.0
6 3,496 15.0
7 3,496 15.0
8 3,496 15.0
9 3,496 15.0
10 3,496 15.0
11 3,496 15.0
12 3,496 15.0
13 3,496 15.0
14 3,496 15.0
15 3,496 15.0
16 3,496 15.0
17 3,496 15.0
18 2,129,603 10.0
19 10.0
20 10.0
21 2,835,690 8.0
22 1,590,136 8.0
23 1,590,136

At Personalfn, we were recently approached by Mr. Pawan Mehra (name changed to protect the client's identity), a 35-Yr old gentleman, who wanted to provide for his 3-Yr old son's education. The client had planned for his son to first acquire an Engineering degree, followed by an MBA degree. In this case study, we discuss how we helped the client provide for his son's education.
Facts of the case
 The child was then 3 years of age. He would seek admission in an Engineering college and a Business school at age 18 and 22 respectively.
 A 4-Yr Engineering degree would then cost Rs 700,000; while a 2-Yr MBA degree would entail spending Rs 520,000. These costs included the tuition fees along with the lodging expenses, assuming that the child had to study in a location different from his city of residence.
Assumptions
 We assumed that the education/lodging expenses would rise by 10.0% pa. As a result, 15 years hence, the Engineering course would cost approximately Rs 2,924,074; similarly, 19 years later, the MBA course would cost around Rs 3,180,273.
 The investment process was split into 3 phases. In the first phase, the highest degree of risk would be borne to clock higher returns i.e. 15.0% pa. The second phase would yield a return of 10.0% pa; the final phase would commence a year prior to the time of admission. Investments in this phase would deliver a return of 8.0% pa.
Planning for an Engineering degree
Child's Age (Yrs) Monthly Investment (Rs) Lumpsum Investment (Rs) Cash Outflow (Rs) Rate of Return (%)
3 5,832     15.0
4 5,832     15.0
5 5,832     15.0
6 5,832     15.0
7 5,832     15.0
8 5,832     15.0
9 5,832     15.0
10 5,832     15.0
11 5,832     15.0
12 5,832     15.0
13 5,832     15.0
14   1,818,326   10.0
15       10.0
16       10.0
17   2,421,206   8.0
18     731,018 8.0
19     731,018 8.0
20     731,018 8.0
21     731,018  
The methodology
 We worked backwards i.e. from the sums desired eventually, when the child seeks admission in the Engineering college and a Business school respectively to the start of the investment process. The intention was to determine how much and where Mr. Mehra should invest (at the start of the investment process) in order to accumulate the target sums.
 De-risking was incorporated into the investment process; hence the 3 phases yielding returns of 15.0% pa, 10.0% pa and 8.0% pa. The intention was to take a lower degree of risk, once the target dates approach. Initially, investments were to be made in high-risk investment avenues like diversified equity funds. By doing so, one could capitalise on the ability of equities to deliver over longer time frames. The second (10.0% pa) phase would entail investments in a combination of equity and debt instruments. The final phase (8.0% pa), that was to commence a year before the admission and run concurrently with the period when the child is studying, involved investments in low-risk debt instruments.
The investment process
The following portion deals with the investment process i.e. how investments were to be made. Expectedly, it's number-heavy and uninitiated readers may not find it appealing. Such readers can skip the following paragraphs and instead refer to the tables to understand details of the investment process.
For the MBA degree
Let's begin with the MBA degree. The child will seek admission for the same at 22 years of age. As mentioned earlier, the MBA degree would then cost Rs 3,180,273 i.e. around Rs 1,590,136 pa since it's a 2-Yr course. This in turn means that when the child is 21 years of age, Mr. Mehra will need to have a corpus of Rs 2,835,690 invested at 8.0% pa (since it's the third phase, involving low-risk investments like short-term bonds and fixed deposits).
To generate the aforementioned corpus i.e. Rs 2,835,690, going back in time (to the second phase, wherein investments yield a return of 10.0% pa), Mr. Mehra will have to make investments in a combination of both equity and debt instruments. Since the second phase runs over a 3-Yr period, a lumpsum of Rs 2,129,603 will have to be invested when the child is 18 years old. This corpus i.e. Rs 2,129,603 will be apportioned between equity and debt instruments in the ratio of 30:70. It has been assumed that equity and debt instruments will yield a return of 15.0% pa and 8.0% pa respectively, thereby delivering an average return of around 10.0% pa. While the equity component can be comprised of diversified equity funds, the debt component can include monthly income plans (MIPs) and bonds.
Between the start of the investment process (when the child was 3 years old) and when he turns 18, is the first phase. This is the phase, wherein Mr. Mehra will invest on a regular basis to accumulate the lumpsum of Rs 2,129,603. Herein investments will be made only in diversified equity funds to yield a return of 15.0% pa. Our Calc tells us that Mr. Mehra needs to invest around Rs 3,496 per month (pm) or Rs 44,758 pa.
For the Engineering degree
Similarly, the Engineering degree will necessitate cash outflows of around Rs 731,018 pa over a 4-Yr period. Since the child will enter the Engineering college at the age of 18 years, Mr. Mehra will need a corpus of Rs 2,421,206 invested at 8.0% pa to provide for the aforementioned cash outflows, when the child is 17 years old.
In turn, the corpus of Rs 2,421,206 will be generated by investing Rs 1,818,326 at 10.0% pa over a 3-Yr period. This is the second phase for the Engineering degree; the same will commence when the child is 14 years old. Finally to accumulate a lumpsum of Rs 1,818,326, Mr. Mehra will have to make regular investments during the first phase.
The first phase will run over an 11-Yr period i.e. from start of the investment process (when the child is 3 years old) to the time when he turns 14. Since the investments will be made in diversified equity funds yielding a return of 15.0% pa, Mr. Mehra will have to invest approximately Rs 5,832 pm or Rs 74,677 pa.
Where investments will be made
For incorporating the equity component, we have chosen the mutual funds route (diversified equity funds in particular) over direct equity investing. The reason being investing directly in equities is akin to a full-time activity. The same would entail researching various stocks, tracking them closely and making changes in the portfolio, in line with changing market conditions. Retail investors (like Mr. Mehra) may not have the time and/or competence to do so. Instead, by opting for the mutual funds route, the investor can access the equity markets and also benefit from the services of a qualified and competent fund manager. Diversified equity funds were selected based on a research process we follow at Personalfn. Also other variants (like MIPs) from the mutual funds segment can help Mr. Mehra in adding a debt component to the portfolio.
By following the systematic investment plan (SIP) route of investing, Mr. Mehra could invest smaller portions of money at regular time intervals, thereby eliminating the need to indulge in activities like timing the markets, which most investors are incapable of doing on a consistent basis in any case.
Finally, unit linked investment plans (ULIPs) are avenues that are often recommended by financial planners/investment advisors on the grounds that they combine insurance and investment in a single avenue. However, we believe investors would do well to maintain distinct insurance and investment portfolios. Most ULIP offerings available don't have much of a track record; also they can also work out to be more expensive propositions over 10-15 Yr time frames vis-a-vis a combination of tax-saving funds and terms plans, which we recommend as a replacement for ULIP investments. Simply put,unless it's an exceptional ULIP offering, investors would do well to stick to the mutual funds segment for investment purpose.
The regular investment trail
It should be noted that Mr. Mehra will be required to make regular investments only until the age of 49 years (i.e. when his child will be 17 years old). Beyond that point, a corpus will be generated that will continue to be reinvested at varying rates. The investment plan was so designed to ensure that regular contributions coincide with a period when Mr. Mehra's income streams (by way of salary) are stable. Also the 'burden' of regular investments will ease over a period of time given that while the salary receipts are likely to grow, the commitment towards regular investments will remain unchanged.
In conclusion...
While it may appear very simple at the end, we recommend that investors who find themselves in a similar situation should not simply replicate Mr. Mehra's plan. Rather they must discuss the situation with their financial planner and let him come up with a tailor-made investment solution.
It must also be understood, that the intention behind this exercise was to arrive at a ballpark figure, so that Mr. Mehra is equipped to adequately provide for his child's education. Achieving a perfect number or creating a perfect investment plan wasn't the intention; neither would it be possible to do so, considering that we are dealing with a 20-Yr time frame.
Constructing an investment plan and executing it is like driving from one place to another through rush hour traffic. Once you are aware of the destination and the course, you may need to take a few detours on the way, but the key lies in never losing sight of the destination and getting there eventually.
Similarly, while providing for Mr. Mehra's child's education, there will be circumstances (like changing market conditions for instance), when deviations may have to be made from the stated plan. However, the key lies in making the necessary changes and ensuring that Mr. Mehra stays on track to accumulate the required funds, by the time the child is ready for higher education.
This is where the financial planner has an important role to play. Not only will he have to help in selecting various investment avenues, he also has to play a part in reviewing the investment plan and incorporating changes, when required. It would be fair to state that conducting a thorough review of the plan is as, if not more, important than constructing the investment plan.
Source: http://in.biz.yahoo.com/moneysimplified/money-simplified-index.html
The August 2007 issue of Money Simplified has this and more.

More for less

The government insurance agent (medical) sent a mail about the annual premium due from us.

It was with two options. With a little over a thousand Rupees extra (27 USD) in the premium from us, the cover for the kids is being upped to Rupees 100000 (2460 USD) from half that amount last year. Also from Rupees 100000, the two of us (husband and wife) and in fact all of us can now have up to Rupees 100000 medical cover.

That is a nice feeling. Not that we plan to use it. But medical insurance is an umbrella that assures you that you can access good medical care, hospitalization or treatment without getting debt ridden.

So, we are happy to avail of the floater option as they call it because for a little more from our side we get a larger cover if the need should ever arise.

But here is to you all, signing off with wishes for a long and healthy life!

PS. Have you taken a medical insurance yet? New India Assurance Co Ltd., Tata AIG, ICICI, and many other players in the market, what are you waiting for?

And if you reside out side India, somewhere in Europe, Australia, Africa or the USA, remember, we all need insurance of all kinds.

The recent floods in England should be a reminder of a case in time. So run for cover (of the right kind), will you?!

Having a Medical Insurance pays

My daughter had to be hospitalized after her viral fever went out of hand. That was five years ago.

I had taken a sabbatical from work and my husband was supporting a family of old parents with expenses on the higher side, our two school going kids and my back-to-college sojourn. So naturally, finances were running low.

He tided over the crisis somehow. But the kid was treated in the best hospital in our district, my husband did bear a big dent in his pocket on account of the medical bills. With no insurance to fall back on, he had to bear it all by himself.

But that was a lesson to him. He learned that one cannot take health for granted and a medical insurance cover is the safety blanket to cushion you from rude shocks of the monetary kind. It also ensures timely and proper/recommended treatment.

So he quickly approached a few medical insurance agents. Before ICICI could spring an offer to him, their regular savings bank customer and investor, a government insurance company of decades of standing made the kill.

For three years almost we paid the insurance premium without any usage. We even earned a no-claims bonus.

Then suddenly the boy came down with a bad case of fever and dehydration. Emergency hospitalization followed and I only told the medical team at the hospital that we have an insurance. Hours after admission I submitted the photocopy of papers that my agent faxed me.

The insurance guys went out of the way to help. I call it out-of-the-way as I was afraid they would not bother. Thankfully, it was done without a hiccup and after a week's stay we left the hospital with no dues on us and yet poorer by not a penny as the Insurance guys had paid the bill.

More medical mishaps were on the way. My eyesight had begun playing truant with me. An ophthalmologist gave me a shocking verdict.

"You have cataract."

I must have jumped out of my skin, almost. The doctor tried to reassure me that it is not such a rare condition and surely treatable. A few newborn babies too have the condition. It is after all nothing but the opacity of the lens...etc.

Surgery is the only cure at advanced stages. Once I fell down at twilight hours and was almost run over by on-coming traffic on Delhi's Ring Road. I knew it was time to think of surgery.

But it was my precious eye! I could not trust it to any doctor down the lane. It had to be the best one whose previous success stories were before me.

So I zeroed down on Centre For Sight in Delhi. But the package they spoke of threw me out of gear.

Rs 30,000/-! Goddamn it, that's almost 732 USD, a small sum for someone in the USA but in India, that is a TV Correspondent's average take-home salary! I wavered, but damn it, it was my eye that I was talking about.

With trepidation, we called our insurance agent.

Surprise!!!

With no ifs, buts or any corners cut, the amount was sanctioned in full and presto! After a week, I walked out of surgery with an intra ocular lens fitted inside the operated eye and no bill to shed tears on.

That's why, I am glad we did not take for granted that accidents, hospitalization and health setbacks cannot happen to us.

Have you had any bad or good experiences with insurance agents? I would love to feature them here. So people, do write your comments and check out the insurance ads that I have here to let you chose.