Imagine your kids being without both parents. Now write the will
How much life and medical cover is required for you and your children were some of the topics discussed in this week’s personal finance call-in show Smart Money. Host Vivek Law, editor, Bloomberg TV India, and Monika Halan, editor, Mint Money, also talk about strategies to build corpus in the long term. Edited excerpts from the show aired over the last weekend:
Vivek: Monika, when you have a child, how do you plan for the child’s future?
Monika: Most people get really worried when there is a child in the family and they start knee-jerk investment plans and unfortunately they all end up buying child plans. But I think we need to look at it a little differently. Step back and look at what is the purpose of financial planning for the child and it is always not about the products that you are buying. Financial products really come at the end of the process. So I would like to break it up into two parts. One, you look at protection, and the second, you look at products. So when we look at protection, the first thing is to insure your life and not that of the child. When you buy a child plan, you end up insuring the child’s life and if you as the breadwinner is not there, then the child and the family has the money to go on for education and the other goals. So in protection that’s pretty much the first thing.
Vivek: That would mean you take a basic term cover for yourself as a parent?
Monika: Yes, basic term cover which should be 8-10 times the annual income. The second of course is a medical cover. You are protecting not just the child’s medical bills but also your savings which gets depleted due to an emergency.
Vivek: So how much should that cover be? I know lot of parents who have `1-2 lakh medical cover from their employer and they think it is enough.
Monika: Per child, I would say have between `2-3 lakh. If you do not have your office giving you an additional cover, I think it makes sense to take a family floater on top of that, maybe another `5-7 lakh. So that in case there is an emergency, you are prepared. One more very important thing which most of us don’t do is to write a will. It is a very scary process when you sit down with your partner. We have been through the process, it really makes you think of what will happen to your children when you are not there to drive the money which may come as a large corpus. So actually simulate it and then build that plan, write that will, put down very detailed plan of when that insurance money comes how is it to be used, what kind of investment products are to be used and then only make that plan.
Vivek: What about the whole process of corpus building? It will take 15-20 years. What’s the best way?
Monika: The Public Provident Fund is a really fantastic tax-free instrument. Exhaust the limit of `1 lakh. You also need equity exposure. You have large-cap and balanced funds for that. Since you are looking at 15-20 years, you can have mid-caps if you have risk appetite. And I wouldn’t go against a 5-10% exposure in a gold fund. So these are your three basic building blocks. The second part is in whose name is the money? I am going to take a fairly radical view here and say do not buy it in the child’s name. Are you sure what your child is going to be at 18 or 20 years of age? What if he wants to blow it up in a start-up and you want him to study further? So its not that you want to hold him back but possibly that maturity may not be there to deal money. So make the investments in your own name.
Vivek: So there should be four categories—large-cap, balanced, mid-cap and gold funds. However, the number of schemes could vary depending on the amount of investment or should it be no more than 6-8 anyway.
Monika: That’s right. No more than 6-8 funds because you don’t need that much diversification.
Vivek: Sreekar, you seem to have bought a lot of mutual funds?
Sreekar: There were a lot of recommendations from family friends. Hence, I put lot of money in different funds.
Vivek: Right, but I think way too many funds, isn’t it?
Monika: What we see in your portfolio is something that we see in a lot of other portfolios. Sreekar, I have looked at your SIPs and it seems that you are a very high-risk investor. Do you see yourself as one?
Sreekar: Yes, you are right because I do not have dependants. But I am getting married soon.
Monika: You will have to cull out two of the mid-cap funds and buy a large-cap fund, even maybe a balanced fund so that there is more balance in the portfolio. Look at funds as a part of your diet. You can’t just have proteins. You will need the moderating influence of carbohydrates. Don’t just go fully into one part of the market. Spread it out and when markets are doing well and when mid-caps are doing well, it’s very attractive to buy those extremely high-return funds but that’s where portfolio diversification is important and in times like this, if you had two large-cap funds, your portfolio wouldn’t be in the red today. I think that really is one of the big changes that you need to make. You have another question on systematic transfer plan. What exactly is your need?
Sreekar: There is a lump sum in my savings account. I want to move it to an account so that it can take care of my SIPs and I am also planning to buy a flat.
Monika: For people who may not know, a systematic transfer plan is a way to make your lump sum get invested slowly into an equity product and not at one shot. You buy a debt fund and then slowly transfer that money at periodic intervals into equity. It’s a way of averaging out the price. In your case, you seem to be in the 20% tax bracket. The fund for you is a ultra short-term debt fund.
You will pick the growth option and you have to remember that you will buy the ultra short-term debt fund from the same fund house whose equity plan you want to transfer the money to.
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