The Money Guru Show with Mr Raj Khosla | Financial Planning for Child Education

Ms Swati Raina of Zee Business welcomes MyMoneyMantra Founder & Managing Director Mr Raj Khosla on Money Guru Show. The topic of discussion is Financial Planning for children.

Here are the excerpts:

Ms. Raina welcomes Mr. Khosla.

Mr. Khosla: In India parents are extremely concerned about their kids. The education of the child is the pertinent investment for the future of your child.  You should always make the best of decisions to plan finances in this direction. An educated child is always better equipped to take care of their future on own.

Absolutely Mr. Khosla! Today’s show will focus on various aspects of financial planning for a child’s future. We will discuss: How to plan for bright future of children? How to pick the best mutual funds to invest for kid’s education & marriage? Which are the better funds to save for education & marriage goals? How to make a complete financial complete strategy for your child?

What are the key factors that determine the investment strategy for your kid’s financial planning?

Mr. Khosla: You must consider factors, such as:

1. Age of child: It will help you determine if you are saving of primary education or higher education.
2. Time horizon of investment
3. Cost of education
4. Rate of inflation
5. Saving capacity: How much you can save each month is as important as how much you need to save to reach your goal.

How does the Investment strategy vary in case your child is aged between 3 to 5 years or under the age bracket of 10-15 years?

Mr. Khosla: The age of the child is an extremely important factor. For instance, if your child is 14 years old, the investment strategy would involve only 3 to 5 years. So you cannot take risk here. The child will be out of school within 3 years and you would need money. You need fixed returns & thus should opt for debt funds. You cannot afford to invest in equity in this case at all.

However, when you are investing for the long run, say your child is 3 years and you are planning for 15 years, your investment strategy would be in a complete reverse. You need a balanced approach. Here you also have to beat the inflation. You will invest in equity stock market, get an SIP plan, invest in FDs, PPF, & have a balanced approach and try to build a corpus so that you get growth and also get fixed returns.

How to invest in Mutual Funds for child education?

Mr. Khosla: When you start early in Mutual Funds you can reap the benefit of compounding. You also build a habit to save and your spendings are also aligned according to your goals from the very beginning.

When goal is set, how should the investment be raised each year?

Mr. Khosla: Theoretically, you must add to your investment, more than the current inflation rate. However it is not practically possible for all. So, do add at par with the inflation. Yes, you must add 5% to 10% each year.

What is the ideal investment strategy for primary education: 3 to 5 years?

Mr. Khosla: For primary schooling, go for debt funds as your investment horizon would be 3 to 5 years. You should indeed go risk-free. I recommend contacting a financial advisor for the same.

Your investment plan should ensure capital protection and maximum tax saving benefits. You can opt for a mix of balanced funds such as HDFC Short Term Debt Fund, Franklin India Ultra Short Bond and ICICI Prudential Regular Savings Plan.

What is the ideal investment strategy for higher education: 10 to 15 years?

Mr. Khosla: For higher education goal, the investment horizon will be 10 to 15 years. It is extremely important to review and re-balance your portfolio annually.

For long term horizon, always contact your financial advisor. You need to invest in a mix of mid cap and large cap equity funds. You can opt for Axis Blue Chip Fund, DSP Midcap Fund, HDFC Small Cap Fund, Kotak Standard multicap, and DSP equity funds.

How good is PPF instrument for child’s financial planning?

Mr. Khosla: PPF is one of the best strategies for the long run investment. It has a lock in of 15 years, which is the only factor that may be a downside. However, it is the best medium to invest today as it give you 7.9% annual return and this is really very good return. You can keep this account active by investing a Minimum of Rs 500 annually. You also get tax exemption.

Audience Query 1: Rushikesh Bhavthankar

Mob. No– 9420316600

 I need some advice on my investments.

My age is 28 yrs and I am working in a PSU Bank at Nashik. Brief details of my Financials are as under:

Net in Hand Salary after deduction of Home Loan EMI (Rs. 13,313), car loan EMI (Rs. 11,056), NPS (6,000) and Income Tax (Rs. 2,500):- Rs.28000/-

Add:- Rental Income:- Rs. 18500/-

Total Monthly Income: Rs. 46500

Present Investments in mutual fund and their current value are as under (Fund Name, Invested amount, current value):-

UTI Unit Linked Insurance Plan- Rs. 3,14,178/- Rs. 3,65,172/-

(Monthly SIP of Rs. 5000/- now discontinued)

ICICI Prudential Blue Chip Fund- Rs. 1,92,000/-  Rs. 2,57,235/- (Monthly SIP of Rs. 3000/- now discontinued)

Axis Long Term Equity Fund ELSS- Rs. 1,27,000/- Rs. 2,07,578/-

HDFC Mid Cap Opportunities Fund- Rs. 1,57,000/- Rs. 1,91,869/-

Axis Focused 25 Fund- Rs. 25,000/- Rs. 26,243/-

Axis Small Cap Fund – Rs. 25,000/-Rs. 25,960/-

Axis Blue Chip Fund – Rs. 10,000/- Rs. 10,229/-

Axis Mid Cap Fund – Rs. 1,10,000/- Rs. 1,15,021/-

FD in Bank :- Rs. 84,000/-

PPF:- Rs. 1,95,144/-

Shares allotted in ESPS:- Allotted at Rs. 1,88,000/- and present value is Rs. 2,35,750/-

Total Investment amount:- Rs. 14,79,322/-

Present value of Investments:- Rs. 17,67,711/-

SIP in Axis Blue Chip Fund:- Rs. 5000/-

SIP in Axis Mid Cap Fund:- Rs. 5000-/

Monthly investment in Tanishq Gold Scheme:- Rs. 4000/-

 I am planning to continue above as long term investment for my family.

We are expecting child in January 2020. I wish to add monthly SIP of Rs. 5000/- for my child’s Higher education and i am planning for RD of Rs. 3000/- for child’s yearly educational expenses.

I already have LIC e-term plan of Rs. 90,00,000/- and my employer has taken medical health plan of Rs. 4,00,000/- in which me, my spouse and my child (expected in January 2020) are covered. I am planning to add one more term plan at the age of 35 yrs. My home loan is covered under Group Credit Life Insurance.

Please suggest investment options for my above mentioned ADDIONAL SIP of Rs. 5000/- and overall guidance on my investment portfolio.

Ans:

Congratulations you have a good portfolio. Since you are already invested in MFs, you must continue and remain invested. The current portfolio is a good mix of equity funds, so it needs to be reviewed and rebalanced annually. For lump sum investments, decide on the exit strategy basis market scenarios and your requirements.

For new investment of Rs 5000 for higher education of the child, opt for SIP of Rs 2500 in Kotak Standard Multi Cap and Rs 2500 in SBI Small Cap. Go for at least Rs 5 Lakh family floater health insurance plan, since in current scenario Rs 4 Lakh medical cover is not sufficient.

Is education loan recommended for higher education?

Mr. Khosla: The decision to opt for education loan entirely depends on your situation if you have met your saving goals or not. Education Loan, per se is a good instrument for funding your child’s education. For, the rate of interest is attractive, you get moratorium – which is holiday from the repayment of loan. The loan is disbursed directly to the university. The repayment starts after the child gets job, you get 6 to 12 months of moratorium after the completion of course.

With Education Loan, you also get tax benefit under sector 80 E.  You can enjoy this benefit on repayment for 8 years.

A word of caution for students who decide to take Education Loan: After the repayment of loan, you must assess your Credit Information Report and ensure that there is nothing that hurts your credit score for no fault of yours. Manyatimes, a negative history of a slight delay in interest repayment may prevail despite the maturity of the account. You must ensure that the bank clears that with credit bureau in all probability.

How important is Term Plan for child’s future planning?

Mr. Raj Khosla: Term Plan is very important for the future of child and it is not an expensive mode. In case of untimely death of parent, the term plan will promise a sum assured to the child, thereby protecting the financial planning for kid’s education. It is thus indispensable part of financial planning.

Term plan is not as costly and you should assess the amount for Term plan basing the future requirement of your child.

Audience Query 2: PRIYARANJAN , Email

Hello, I am a NRI citizen. I blessed with a baby in recent past. I want to invest for his education through SIP mutual fund.

Kindly suggest some best MF which will be fulfill my requirements after 15 years.

Ans 2:

First of all Priyaranjan, you are an NRI. There are certain specific guidelines and processes which you should strictly follow. Kindly refer to them before you start investing in Mutual Funds in India.

As for fund suggestions; opt for a mix of mid cap and large cap equity funds such as Kotak Standard Small Cap, Axis Buechip, UTI Long Term Equity, and HDFC Small Cap. The allocation would depend basis your current income and final goal. Contact your advisor too.

How to calculate Inflation rate and how important it is to calculate inflation for financial planning?

Ans: Take average inflation rate of last 10 years. Also World Bank and IMF forecast country-wise inflation rates regularly. You can take both the stats and add 2% to the average of the results and make your goals on this rate.

Audience Query 3: ANIL HARER. 9930999012

Dear Sir, I have  two daughter’s  – one  now age 14 years old (10 the std.)and one 9 years old (5th std).

My age is 48 years old  i have doing investing from last  three years- in LIC  GEEVAN  SARAL  PLAN  MONTHLY Rs.5000/- each . 1,80,000

Also in POST OFFICE  -YEARLY Rs.35000/- each 105000

Kindly guide me any other best plan  for her higher education i.e. in future after B.E. Computer science  they want to do MS IN COMPUTER SCIENCE  at USA. for higher studies.

So that  i will get higher returns …

Ans:

Given you are already invested in fixed instruments and have a time horizon of 8-9 years, it is recommended to invest in mutual funds though SIP route. MFs investment will ensure risk-adjusted higher returns, disciplined saving along with a flexibility to withdraw as per your requirements.

First you must assess your future needs and based on your current savings, income and time horizon, you must pick the funds. You should choose a mix of mid cap and large cap equity funds for higher returns. You can invest in Axis Blue Chip Fund, HDFC Small Cap Fund, Kotak Standard multicap, and DSP equity funds. Hike SIP by 10% every year.

What all are the other instruments that we can include in financial planning for our child?

Mr. Raj Khosla: Besides the equity and debt instruments we have discussed above, you can also include following

RD: When planning for long term, you can certainly include recurring deposit. Though it is an old fashioned way of saving, but it is a monthly saving plan and one can invest in it for the long term.

I also feel that one may invest in a small residential property as per the capacity and liquidate later on as per the need. This is another asset class which can help you achieve your goals.

Sukanya Smridhi Yojana- It is a fantastic scheme. As you get your laxmi (daughter) home, you must opt for this Scheme.  It is a long-term investment scheme for a girl child below 10 years of age. The account remains valid till the child turns 21. You can partially withdrawal after the child turns 15 years of age. The return is very good at 8.4%. A must plan for girl child.

ULIP- ULIP involves moderate risk. It has tax benefits and you must enjoy the available benefits.

So, there are so many instruments to save for your child’s future. Thank you Mr. Raj Khosla for helping our audience learn the secrets of investing and planning for education goals of children.