Showing posts with label investment. Show all posts
Showing posts with label investment. Show all posts

Saturday, September 1, 2012

Give your kid a kicker

How to make the cash gifts received by your child multiply and give him an edge when he grows up
It all starts with small gold coins, small rings, toys and other items when your child is born. 

As she grows up, there are gifts of cash, National Savings Certificate (NSC) or bonds on birthdays and other occasions. Can all these small windfalls for the apple of your eye be dovetailed with the larger gameplan you have for securing her future? Can these gifts enhance the corpus you are building for your child's various future needs? The good news is that if you invest the cash and financial instruments gifted to her, your kid is likely to have a sizeable amount in her kitty in the future that will help meet her financial requirements. Handling gifts. A crucial first step in making the gifts to your child turn into a lifelong advantage is to keep a list of them, whether it is cash, fixed deposits, bonds or life policies. Since your child's income is clubbed with yours and you will have to pay the relevant taxes for the amount earned by her investments, this drill is helpful in your tax management. Ideally, keep a log of gifts that the child receives on different occasions and, more importantly, mention the source of gifts. This will be useful if your income tax details are ever scrutinised by authorities. The other thing that you will need to take care of, while investing the gifts of the kid, is not to mix them indiscriminately. For exam in a year if your child has received Rs.10,000 as a gifts and you plan to invest it in a bank fixed deposit, do not add any more money to it before investing. It will help you track the progress of this money better. Investing gifts. The form in which cash and other financial gifts are given to the child may not be ideal by themselves to hand your child a future advantage. In many cases, you will need to invest or reinvest to put it on the growth track. "Invest the gifts in a manner so that apart from capital appreciation, are also tax free," says Veer Sardesai, a Pune-based financial planner.
A key strategy for getting the most out of the gifts is to invest a major part of them in higher-risk, higher-return growth assets, such as equity mutual funds and gold. These investments not   • only provide you with you capital appreciation that beat inflation in the long-term, but are give tax-free returns too. So, ideally, invest the cash gifts that the kid receives in instruments like   -index equity funds.
Alternatively, you can invest in Public Provident Fund (PPF). In that case, it is advisable to open the account in your child's name and deposit such cash gifts there. In case, in a financial year, the kid does not receive any cash gifts, then, for that particular year, just make the mandatory payment of Rs. 5 00 in the worst case scenario. Otherwise, you can keep making contributions there as part of your regular game plan of investing for the child's future.
In case the kid receives gifts like units of mutual funds, say from grandparents, find out its track record and how actively it is being managed. "You always have the option of selling them and investing the same in funds where you are more comfortable with," says Sardesai. However, if the funds are actively managed and the job is being done well, you can continue to hold on to these instruments.
When it comes to gifts of life insurance policies, typically from grandparents, make sure that the life assured is that of the grandparent with you as a the guardian and the child as the nominee. Remember, a regular premium plan needs to be serviced and it is better done by the grandparent. If it is a single premium plan, a more convenient option due to a single payout, the life assured should be the grandparent again. Discourage grandparents from gifting traditional plans, since their returns lag inflation. If insurance plans are to be gifted at all, market-linked plans, such as unit-linked insurance plan (Ulips) with premium investments in growth options is preferable. Other gifts. Gold ornaments are one of the most popular gifts received by children, especially the girl child. Selling them does not make sense since you will typically need them later, when she gets married. You need to have a plan by which you pass them on to your children when they become majors, or, perhaps, on the occasion of their marriage. The same is true for coins and bars, which will be useful for funding gold jewellery at the time of marriage. This will help you fund the wedding expenses—if you were planning to do so—better.
In the US, there was a time when it was fashionable in some families for the grandparents to gift children shares of soft drink giant Coke, because of the value created over time. In India, you can also work towards making the gifts that your child receives equally enduring and rewarding for her.

How to achieve financial goals through money-saving?

It is important to link your savings to goals. A life insurance, besides creating a corpus, offers protection Saving money without having a plan in place never works. 


One should link his or her savings in any financial product to certain goals. Life insurance products help in savings only over a longer term. They are front-loaded in the sense that a bulk of the premium is deducted as charges in the initial years. Thus, an early exit doesn't help in savings.
One should buy life insurance products—traditional policies such as endowments plans or money-back plans—or unit-linked insurance plans (Ulips). which are market-linked, only when the goal is at least 10 years away. Traditional products merely offer protection of capital over a long-term and most of the time their returns do not beat inflation. Those who wish to bundle protection and savings and also get returns higher than inflation should choose Ulips with largely transparent charges, fund options and flexibility. Regular savings in products having lock-ins instil discipline and prevent you from liquidating investments in a hurry. When the savings in life insurance products are not linked to goals, the returns take precedence. Fund values are evaluated after each year and lower fund values bring forth skepticism, ff the goal is far, volatility in equities are taken in one's stride.
At times, insurance plans are bought only for the sake of saving taxes and  the exit is made immediately after the lock-period is over. Investors typically expect high returns from Ulips. akin to those from stocks and mutual funds. When the initial results do not meet expectations, they make an early exit. Now. having bought an Ulip for meeting a long-term goal, such as a child's education needs, ideally, one should keep investing the premiums in the all-equity fund option. This is largely because equities deliver returns higher than inflation over the longer duration. On the other hand, the stockmarket will keep showing volatility every now and then with some being good years and the others bad: the bad ones showing a fall in equity prices. Over longer periods it has, however, been witnessed that the economy shows resilience and better valuations, and generates returns better than other asset classes. As such, link your savings to goals such as children's education, marriage or your own retirement and build a healthy corpus through the years.