Aaaargh! 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. |