[deky]

We have a year old daughter and are thinking of making some kind of investment for her so that we can save money plus reap returns (to be used for her schooling) in the near future.

I have been speaking to investment consultants from a few banks and taking in regard the market situation am getting really confused. Everything on paper looks very good but no one can gaurantee any returns (specially in case of mutual funds related investments.)

I would like to know and get your advice on the following for investment.

1. The investment cant be in our daughters name has to be in either the father's or the mother's name. Is that right?

2. keeping in mind the volatile nature of the market what will be the best and the safest investment for our daughter, that in say 10 years time will yield decent returns.

3. The type of investment I am looking for is a monthly investment of "X"amount for a period of say 10 years.

4. Will this amount help us in saving income tax also? what abaout the tax on gains, is that income tax exempted too?

5. Mutual funds, Post office, NSC's etc etc what are the various options available with us?

Keeping an eye on our daughter's future, all help, all suggestions, all discussions in this matter will be greatly appreciated.

Thanks
Dhiraj

[five46]

If I were in you place, I'd look for a MF SIP

[deky]

Originally Posted by five46

If I were in you place, I'd look for a MF SIP

pardon my ignorance but I am totally new to this stuff MF= Mutual fund i guess but whats SIP???

[dushmish]

Hi Dhiraj,

It is a genuine concern you have shared for your kid. Providing for a child's future is what all parents worry for. The problem should be broken in parts: Lets assume there is this person named Ramlal who needs to plan for his son's future.

1. providing for the child when he is there
2. providing for the child when he is not there

In case 1 - the options are:
a. PPF
b. NSC
c. other bonds (RBI, KVP, Nabard, etc.)
d. Recurring deposits
e. Mutual funds
f. Insurance - traditional plans
g. Insurance - ULIPs
h. Real estate
i. Gold

For case 2 - the options are:
a. child plan (insurance)
b. term insurance plan

Ramlal should plan for both cases. There are inherent pros and cons of the investment options available for case 1. The good thing is that Ramlal lives through the term of the investment and is there to manage the finances for his son. We all believe this is what will happen to us. I will be able to provide for my child's education is what we all want to believe.

Whereas in case 2, when Ramlal dies, the insurance provides for the education of the child. Again there are pros and cons of both term and child plans.

I suggest you build a mix of investment options from case 1 and case 2. The amounts will depend on your context. I will be pleased to respond to any specific querry you might have. Am not an expert but know a little about them.

All the best!

Dushmish

[rudrah]

Originally Posted by deky

pardon my ignorance but I am totally new to this stuff MF= Mutual fund i guess but whats SIP???

SIP stands for Systematic Investment Plan for Mutual Funds(MF)

Its similar to a regular recurring deposit in banks. You need to invest fixed amount every month for a particular period rather than putting a wholesum. SIP benefits you when the stock market is low and you get more units. Its always better than investing a wholesum in MFs. This is applicable to all MFs schemes like equity, debt, Tax saving etc.

I'm also in search of a similar plans...i'll be quietly following this thread

[shipnil]

As suggested by Five46, over a 10 year period, I guess MF SIP would be a good option. You can save on tax if you invest in Tax saving schemes. But those should be in your name. Post office and NSC will give you returns in the range of 8%. These will be assured returns. The interest accrued needs to be clubbed with your income for tax purposes. For MF SIP since you will withdraw only after 10 years, there would be long term capital gains tax only. But at this moment is nil but no one can tell what would it be 10 years down the line. But historically it was around 10% only. And this is applicable to gains only and not the principal you invested through out 10 years.

[bullinb]

Given your requirements, I would suggest suggest a 70:30 split into equity and debt. 70% into two good diversified equity funds and 30% into an income fund - all though monthly SIP. There is tons of info out there - start with valueresearch.com and moneycontrol.com.

[five46]

SIP stands for Systematic Investment Plan.

There are n number of mutual fund products in which you can endorse a SIP.

SIP is a very useful tool for your long term financial goals. Reason being, an SIP enables you to invest a small amount every month, in turn making you invest at all the points of the market over a period of time.

For example:
You start an SIP today when Nifty is at 2750.
Your SIP will buy say 100 units of some 'xyz' fund at Rs.10 each.

Next month say the market (Nifty) is at 2650
Your SIP will buy say some 120 units of the xyz fund at say some Rs 9.3

Then say the market is at 2800 in the succeeding month
Your SIP will buy some 90 units of xyz fund at say some Rs 10.9

In this manner you'll be buying units from the market at all points. So, the volatility of the market will inturn help you to average out your buying price over a period of time. Then after some uears when the market is ripe you can encash your units.

You can refer to some AMC/MF companies websites for more details. Similar learning about different investment avenues can be got here

There are a few AMC/MF which also give critical illness benefits/insurance cover along with their SIPs. If you opt for an ELSS (Equity linked Saving Scheme), you can get tax exempts as well.

Another point, if at all you decide to invest in a MF, walk in to the office of the AMC/MF company and make a direct investment. This will ensure that you save on your entry loads associated with MFs.

Please take some good time out to have proper research about what exactly are your financial requirements and which form of investment will best suit your requirements. Don't haste!

And, albeit I was a sales guy, I'll always ask you to be aware of some non-ethical sales reps who may sell you a false product.

Cheers!

PS: Mutual Fund Investments are subject to market risks and blah blah... But, it is true.

[deky]

Guys, thanks for all the inputs, please keep them coming, as of now I think MF SIP seems to be the best option over a period of 10 years, untill and unless someone here strongly suggests against it, lets see. I will wait and watch and do research as I am in no hurry.

P.S. Mods, thanks for shifting the thread in the right place

[phamilyman]

invest a good amount now into FDs/savings. once the fundamentals improve slightly - then MFs. You want to ride out each 7-10 year cycle instead of being blindly invested forever.

[DCEite]

Originally Posted by phamilyman

invest a good amount now into FDs/savings. once the fundamentals improve slightly - then MFs. You want to ride out each 7-10 year cycle instead of being blindly invested forever.

Now is the time when the stocks are cheap and MF NAVs are low. What you are suggesting is called timing the market. Its very hard for an ordinary investor to predict the start of a bull run. This is where SIP actually is a useful tool. When the NAVs are low, you buy more units, and when the NAVs are high, you buy fewer units. The power of compounding works best when regular investments are made irrespective of the market condition prevailing at the current time.
Of course that does not mean that one should invest all amount in one investment class. To devise an ideal mix of debt and equity is the key and in that regard a well qualified financial planner can help.

[NetfreakBombay]

Originally Posted by dushmish

For case 2 - the options are:
a. child plan (insurance)
b. term insurance plan

Two things:

1.

Stay away from "child plan" type of insurance policies. These are way too costly.

If you invest 20,000 into these policies, not all of it would be invested and a large amount would go to insurance company as various fees and charges.

Instead of this,

a. Look at investments in MF. In form of SIP and in a diversified fund.
b. Keep 20 - 30% of money in a recurring deposit. Its like an FD but you keep adding to it every month. This will ensure safety of money.

2.

DO buy one of the term insurance policies. You can ensure that your kid will receive 40 - 50 lakh in case of something unfortunate.

This cover wont cost more then 15- 16k a year. But will ensure that your family would be financially secure.

[ashthedivx]

Good to see people getting much more informative in the regard.

Originally Posted by NetfreakBombay

....

DO buy one of the term insurance policies. You can ensure that your kid will receive 40 - 50 lakh in case of something unfortunate.

Do we have any policy provider which provides accident death benefit as well. Does including the rider increases premium too much ??

[rkg]

Originally Posted by deky

Everything on paper looks very good but no one can gaurantee any returns

1. The investment cant be in our daughters name has to be in either the father's or the mother's name. Is that right?

2. keeping in mind the volatile nature of the market what will be the best and the safest investment for our daughter, that in say 10 years time will yield decent returns.

3. The type of investment I am looking for is a monthly investment of "X"amount for a period of say 10 years.

4. Will this amount help us in saving income tax also? what abaout the tax on gains, is that income tax exempted too?

5. Mutual funds, Post office, NSC's etc etc what are the various options available with us?

Keeping an eye on our daughter's future, all help, all suggestions, all discussions in this matter will be greatly appreciated.

Thanks
Dhiraj

The safest option with guaranteed returns is PPF.

Invest @ 5800/pm for 10 years. ( max limit as of now for PPF is 70K per year).

At the present rate of return i.e;@8% you get 10.68 lakhs at the end of 10 years.

You can do PPF in you daughter's name and claim Income tax rebate for yourself as the daughter is minor

The returns are tax free.

In addition take on term policy in your name for as much cover as possible. this will cover risk

Never ever do in Unit linked plans or Children insurance polices (which are nothing but money back policies) etc.

MF do have risks. If you have appetite for risk go for it.

[Ravveendrra]

One part of me is glad that you started early, another agrees with Sam and I wonder "What have we come to?"

Looking back on my own life - let me recount the important things that I thank my dad for (may his soul rest in peace).

1. A shelter, a place to call my own. Put down the money to buy a residence. Remember though that Flats are depreciating assets and will lose value over time. The price may show an increase, but once adjusted for inflation they will show a loss - ever notice how new flats always fetch more than old flats in the same area?

2. Some shares in blue chip companies of his day. They have proven their worth over the decades, with regular dividends, bonus issues, rights issues etc. They are blue-chip scrips even today and show no signs of letting go of their position.

3. In those days the only MF (Mutual Fund) was UTI (Unit Trust of India). My dad (wisely) stayed away. Today on the other hand, a well diversified investment in Mutual funds (well diversified or broad spectrum funds) is an essential. Start with plain vanilla large cap, diversified funds and then move into sectoral and thematic funds as your corpus grows. Stay away from sectoral and thematic funds in the beggining.

4. My dad bought two pieces of urban land. One we lost due to litigation with the Government, the other more than made up for this loss (bought for some Rs.80K about the price of a good car - it paid out a whopping Rs.5 cr - the price of a supercar!). So urban land is a great investment for the decades to come.

5. ULIPS and the like are much touted and reviled, with good cause. The costs of ULIPS is normally too high. The 30% return that the sales guys talk about is a big "IF" and that too it is 30% of the amount you pay less the charges. The charges can be as high as 35% so you get 30% of the 65% as return. There are however some good schemes too. Ask your banker for details. Ask the agent to specify in Rs. and Paise the charges, rates etc charged in each year and on each event from the date of signing up to the date of the company repaying the amount to you or your kid. Total all the expenses and see what percentage they work out to. If it exceeds 21% in any year drop it. I have one that my bankers sold me from Bajaj Allianz, it is 3 years old now and I intend to stop paying the premia this year while the cover extends for another 15 years. I have worked out with several bankers and investment advisors the costs and benefits of an ULIP and have figured out that they are too expensive for my tastes. Incidentally I do not think that my son depends on my earnings from my profession, so he will not lose if I drop dead, therefore according to me, there is no insurable value in my life. The scene would be different if I was the sole bread winner and the family was dependant on my wages, salary or earnings.

6. Life insurance. A plain vanilla life insurance policy that pays out when you die or are incapicitated might be much better and cheaper than a ULIP. Insure your life (or your wife's, if she earns too), do not insure your child's life.

7. Fixed deposits. These are mere alternatives to idle balances in savings bank accounts. They are useless as long term investments. My dad took out a cumulative FD 30 years ago. The amount invested was about Rs.1000/- (the salary of a senior officer at that time). I got in 2008 a sum of Rs.20,000/- (a small fraction of the pay of a similarly placed officer in 2008). Inflation takes it toll. One rupee today is worth a small fraction of what it was worth in 1978. A small amount in FD is recommended as it is liquid and generates cash at a moments notice. They also acts as cusions in case of deflation - which seems likely in todays recessionary mood.

8. Gold. This is a great investment tool. The trick is to not buy jewellery but coins or biscuits, these do not have wastage, making charges etc. and you get full value on re-sale. Alternatives to gold are - diamonds, Burmese rubies - rare, Colombian emeralds (very rare) and Basra Pearls (no longer available - their price is set to sky-rocket as the oyster beds where these lovely sea water pearls came from do not exist any longer thanks to our greed for oil). When buying stones or pearls buy the best quality, small ones of indifferent quality have no value or worth in the resale market. There are some Exchange traded gold funds (ETGF), but these have some transaction costs. Stay away from the "Gold thematic" funds sold by Mutual Funds - these are not investments in gold, they are investments in shares of companies that mine gold.

9. SIP or systematic investment plans are the MF equivalent of Recurring Deposits. You invest a small amount from each month's income in a fund of your choice. A great option for the fixed income earner. The cost of acquisition is an average over years and they give the returns of MFs.

10. PPF or public provident fund, open an account in a post office or SBI. There are some restrictions on withdrawal etc. but the returns are great. The balances in this cannot be attached by court and there are tax breaks too.

11. Art - this does require some time to be spent on acquiring an 'eye'. Besides the growth in value, you will enjoy looking at it.


Points to note.

The ideal mix is reckoned to be something like - 1:1:1 (1/3 in shares and equity MFs, 1/3 in FDs, Debt MFs, debentures and bonds and 1/3 in Real estate [other than family residence] art, gold and other non-conventional investments).

Always take your returns out - and re-invest them in alternate asset classes. Do not go in for a growth or re-investment scheme, opt for the dividend payout schemes.

When an asset shows a decent appreciation or return - book profits, do not wait for extra-ordinary returns. There is never a free lunch being handed out.

Distinguish between appreciating assets (like shares and land) and depreciating assets (like flats, cars - unless they are antiques, and gadgets). Buy the appreciating variety and buy only what is absolutely necessary out of the latter.

I know that I have not given a specific answer as to what to buy for the new-born (now half-year old) but this is what I did over the years for my 6 year old. I hope that when I pass on, my son will have a residence that he cannot be chucked out of, a piece of land that keeps growing in value and giving a decent return in the form of crops, some shares that hold their own in a feckless world, some mutual funds that generate enough cash for expenses, some art to enjoy and put away for a rainy day, some debt instruments that are easily liquidated in case of an emergency, some insurance that tell him that his old man is more useful - dead!

Plan the family finances as a whole integrated unit unless you are wealthy enough to have three or more portfolios. The "child" plans, "education" schemes, "wedding expenses" funds etc. that are touted are mere marketing gimmicks to sell over-priced products. Keep an eagle eye out on the costs of any financial product that you are considering.

The best investment for your child is what you invest in him: your love, effort and time with him.

Cheers and best of luck.