Plan For Your Child's Higher Education

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The importance of education for children cannot be underestimated. It is vital for their development, growth and success in life. For parents, it becomes vital that they ensure that their children are able to fulfill their life goals by investing in their education.


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An e-book that can help you plan for your Childs Higher Education Written By Ajay Kumar Jain CMD Swaraj Wealth Management Pvt Ltd

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How to become S.M.A.R.T. PARENT SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d I believe you have given the best to your child up ll now. You are the best parent ever. Your child feels you are the best Papa in the world. The child always talks about My Papa My Mamma with a mix of pride and sasfacon. The me had passed when your parents and even socio‐environment had no or very fewer aspiraons from you. They only wanted you to be a decent earner whatever the way it may be. Whatever you are today was not demanded from parents or society. Many things may have happened in a usual way. Today me has changed. Mr. Arun a big business man of the town talked about his aspiraon for two daughters in this way “I wish my daughters to study at Harvard or Cambridge. The reason is very much clear that aer geng out of Harvard or Cambridge they will be competent enough to understand about the future objecve. Then even if they ask to marry I will say ok go‐ahead”. Everyone has right to aspire as he wishes. He put all the data in front of me as for how much and when he will need at the me when daughters will go abroad including Educaonal living and traveling expenses. 1

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SMART Educaon Planning In fact every financial goal should be S.M.A.R.T. SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d S Specific Well defined M Measurable Know if the goal is obtainable and how far away compleon is A Achievable Not an imaginary tale R Realisc Within the availability of resources knowledge and me and T Time‐bound Enough me to achieve the goal. 2 Seng Smart Goals in life surely leads you to smart results… In the case of Mr. Arun the purpose of sending daughters abroad fulfils all the parameters of being SMART. Apart from these goals I helped him to measure and plan other life goals like se ng up a big Hospital daughters marriage etc. Everyone can achieve his financial goals in his life with the best planning in place. Only a sound financial planner can convert a financial goal into an S.M.A.R.T. Financial goal. Make Sure Goals Are Specific Measurable Achievable Realisc Time ‐ Bound S.M.A.R.T. S M A R T S.M.A.R.T. Resultant Success Momentum Atude Reality Trust

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d 3 Some people unknowingly or reluctantly set a goal for their childs higher educaon which doesnt qualify for being S.M.A.R.T. in other words they dont know what financial goal is. Mr. Vivek rang me up one early morning to come to him and make plans for his son to go abroad to study MS from the US. He and his wife were in a dilemma since long whether their aspiraon about their son was achievable or not. His son was in the 1st standard that me. He belongs to middle‐income group family. For a person like him with many other responsibilies the financial goal was Specific Measurable and Time‐bound but not Achievable and Realisc. The reason was very clear. His income didnt match with monthly investment need to achieve the goal. Should he drop the aspiraon and think twice He cant delay the ming of the goal and dont want to compromise the size of aspiraon. The only thing that can be planned was to increase his familys disposable income which was enrely possible. So he decided to switch the job with higher remuneraon and his wife also decided to go on the job as per her qualificaon and the income was doubled in no me. Now with best financial planning the goal was converted into SMART. Again the queson comes are you the S.M.A.R.T. parent ever Have you ever calculated the up shoong educaon costs every year Have you considered Educaon Inflaon while planning for your Childs Higher Educaon Have you tested your childs educaon goal on parameters of being S.M.A.R.T

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Everyone has right to wish. Every desire has a cost aached to it. The cost of goal has to be borne by the Desire only. That cost can be any amount depending upon magnitude and distance of me to fulfil the desire. It is less if the goal is very near in terms of me or cost and it will get wings of inflaon if the me distances increases. Inflaon is directly proporonate to me. It gets on mulplied exponenally. Compounding effect will be evident if you calculate effecve Inflaon. If I say the cost of educaon increases every year 10 per year compounding means the cost of inflaon of Educaon in India is 10. For example if the cost of 2 years MBA course at IIM Ahmadabad was Rs 2lac in the year 2002 and today it is Rs 20 Lac. Then the rate of inflaon of educaon cost at IIM A comes to be 16.5 per year compounding. Means 15 years back at least 20 students were able to study for Rs 20 Lacs and today Rs 20 Lacs is not enough to educate a single student at IIM‐A. In other words value of money has devaluated in last 15 years. So if you are looking for your 3year old son to go for MBA at IIM‐A 15 years from now be ready for ten mes cost. This is not to make you worry but to help you plan for the best. SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Desire is important 4

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d It is a well‐known fact that equity investment is always done for a period more than 5 years of me. Anywhere in less than 5 years there is a risk on loosing on capital. Mr Avinashs wife approached me to suggest her husband a good SIP for her 3 year old Daughters higher educaon. Aer vising their financial planning Avinash was shocked to know that he would have to invest at least Rs 11000 per month as SIP. Although his earnings were as small as Rs 25000 per month. He was under pressure of aspiraon and financial crunch at the same me. I simply suggested him to prepare a monthly balance sheet. There he came to know what he owns and what he owes. With a fair rebalancing of expenses and income in the balance sheet he was hardly able to invest Rs7000 per month with a promise of addional 10 of SIP amount contribuon as Top up SIP every year. “Dear Sir it is too late to plan it aggressively because me horizon is very less say three years only. So I cant suggest you any equity oriented scheme aggressively. You have to compromise on lesser returns generated by Debt Funds only or Bank FDs and RD. That way Monthly regular contribuon amount will be very high which I dont know whether you can afford or not. Here you should know those bank investments whether FD or Rd are taxable and usually give a very lesser return. My suggeson for you is to both start SIP and invest Lump sum money in good Debt Mutual Funds as recommended with your best possible amount and let it accumulate through this period. Rest of the amount will have to be arranged from different sources like Educaon Loan or private loan which I scarcely suggest”. Why I suggested a SIP in Debt fund was because if he bets on equity equal chances are there he may lose some of his principal also in this short period . Once I received a queson from a client “Dear Sir My son is in 10th Standard. He is quite intelligent. He is willing to study Astrophysics from a reputed Instute of USA. Kindly suggest the best plan. Where should I invest as one me and regular basis to get maximum returns” In reply I had to show him a mirror. 5

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Seven steps to plan childs higher educaon STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 Compare the childs higher educaon Goal at all Parameters of being S.M.A.R.T. Quanfy rightly a Amount‐ Nearest Inflated Future Cost b Time distance‐ Decide the exact year when your child will go to Higher Educaon. Invest in right asset class mix‐ different asset class mix is recommended for various me horizons. Start Early ‐ Early Bird catches the worm. Invest regularly‐ adopt the route of SIP with the top up the facility and Lump sum both in Mutual Funds. Revisit the plan at regular intervals or whenever there is a subsequent change in your financial life ‐ it is of utmost importance otherwise all exercise go fule. Follow all above religiously. 6

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Quanfy the Goal In Terms of Money: First of all one should know cost of his Financial Goal Childs Higher Educaon in this case. While doing research about the goal he should not leave any stone unturned. It would always be beer if he can draw a clearer picture of what he would require if so ever his child has to go for the best Higher Educaon today. You need to do every possible exercise of cost calculaon today itself as there is no tomorrow. In Terms of Time: Time plays a vital role while deciding the future cost of any financial goal. Time is the only factor which can control Rate of return. Longer the me available to achieve the goal lesser the amount you will require to invest inially. This has been proved with so many examples. Following Table show impact of rate of interest in a fixed me horizon. As the rate of interest per year compounding increases for a fixed me period the end usable amount increases. Future Value Calculaon growing Compounding Rate – Ann 8.00 10.00 12.00 15.00 Present Value Rs. 1000000 1000000 1000000 1000000 Total years of Investment 15 15 15 15 Future value Aer 15 Years Rs. 3172169 4177248 5473566 8137062 In the table below it is apparent that with increasing me horizon and with a constant rate of per year compounding interest the money gets mulply exponenally . 7

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Present Value Rs. 1000000 1000000 1000000 1000000 Aer years of Investment 5 10 15 20 Compounding Rate – Ann 15.00 15.00 15.00 15.00 Future value Rs. 2011357 4045558 8137062 16366537 Future Value Calculaon growing Note : In the above examples it is mandatory to note that investment was done in mutual fund schemes which have a record of consistent performance of approximately 15 CAGR. It is just for example. Once you quanfy the cost and me you can calculate future cost of the goal. The last table depicts that if the cost of MBA from IIM A for the first year is Rs 1000000.00 today and at the inflaon rate of 15 per year compounding the future cost aer 20 years from here will be Rs 16366537.00. And for total 2 years course Rs 16366537.002 Rs 32733074.00 Now you are ready with the data. If you aspire your son to go to IIM A for MBA aer 20 years be ready with Rs 32733074.00 or take an educaon loan or forget the aspiraon. Invest in right asset class mix ‐ Invesng in right asset class mix is as important as taking right medicine for the well‐defined disease. When you approach a doctor for the medicine he does an invesgaon and then writes a different kind of medicine with a suitable mix of salts. And prescripon of one paent doesnt necessarily resemble with the others. Exact the same way every investment need has different asset class mix. Planning for one childs higher educaon may not mirror to that of another child. To come to an ideal planning first we should understand about asset classes and their mix. 8

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d To plan for a childs Higher Educaon a mix of Equity Debt and Cash is an ideal combinaon. Longer the horizon you have more equity proporon can be prescribed in planning. Child Higher Educaon Equity Cash Debt Here is a basic guideline you can use to decide the right scheme for your childs higher educaon planning. Asset Class There are five different asset classes which are most popular. 1 REAL ESTATE 2 EQUITY 3 FIXED INCOME INSTRUMENT DEBT 4 PRECIOUS METALS 5 CASH 9

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Divide the financial goal in terms of me 1. Very Long Term More than ten years to go for higher educaon. For this period a Mutual Fund Scheme with around 75 equity holding can be recommended. Aggressive You can see here that 100 equity schemes are never suggested for Childs Higher Educaon Planning. There is no need to be a very aggressive investor because this goal is very Specific Measured Achievable and Realisc and Time Bound. A childs Higher Educaon is very much predefined. It cannot be postponed in any circumstances. It is a queson of aaining a lifeme goal. Very rarely asset allocaon paern can be customized as per the risk appete of the investor. We have thought‐out a very specific strategy for the people who carry a big bally for taking risk and reward. This strategy is termed as Core Satellite with punch of Liquid fund . Core Funds will take you towards the goal and Satellite funds will boost up the power of Core fund and to gather plinth the goal. Punch of Liquid fund will help you in many ways in this porolio strategy. It will help you create a liquid corpus for any exigency. Exigency may be anything from urgent to important. This is fully customizable strategy. This is not “Fill it‐Shut it ‐ Forget it” Strategy. It has to be designed on one to one basis. To get it please feel free to call us at 9993025625 or visit 4. Very Short Term 1‐3 years to go for higher educaon. For this period a Mutual Fund Scheme with around 0 Equity holding can be recommended. Very Conservave 2. Medium Term 5‐10 Years to go for higher educaon. For this period a Mutual Fund Scheme with around 50 equity holding can be recommended. Moderate 3. Short Term 3‐5 Years to go for higher educaon. For this period a Mutual Fund Scheme with around 25 Equity holding can be recommended. Conservave ecommended. Very Conservave We are lucky enough that we are living in India where different combinaons of asset mixes are available. A dedicated fund manager is there to manage this asset mix. They call it Hybrid Fund or Balanced Fund. It may be equity oriented where equity proporon is more than 65 or debt oriented where equity rao is not more than 65 One crucial thing to note is that as the name Balanced Fund suggests that the fund manager helps you to balance the asset mix. 10

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Recently another asset class is being introduced to balance the porolio which is Hedged Equity. Hedged equity is an asset class which gives returns equivalent to debt but as per regulaon it has the benefit of secon 1038 of ITA. So if the Returns From your Asset Mix ‐ Would it be good if you get returns like a roller‐coaster. Highly volale That way you need to sit in front of the TV to watch the volality of the markets. Its like si ng on the drivers seat and unable to sleep the whole night. Every me you awaken if at the me of your goal achievement your investment roller coaster is not on the downfall. So chances of meeng an accident are very high. Wouldnt it be beer that instead of driving the car on Roller Coaster Road you tend to hand over the driving seat to an expert driver and sleep at rest The expert knows beer how to drive it. The fund manager of any mutual fund scheme is believed to be a beer driver. Early Bird catches the worm. The right me to plan for higher educaon starts as a child takes birth. Many mes financial condions dont permit or may be by ignorance or unknowingly most of the parents were not able to plan it. It is very much evident from so many instances that winner will be only he who started early. The chart below clearly depicts that if Mr. Ramesh invested Rs 1000000.00 just five years back would be able to reap only Rs 2011357.00 whereas Mr. Suresh had invested the same amount 20 years back and he can make Rs 16366537.00 out of it. Certainly Mr. Suresh took the benefit of an early bird. Start Early Future Value Calculaon growing Compounding Rate – Ann 8.00 10.00 12.00 15.00 Present Value Rs. 1000000 1000000 1000000 1000000 Total years of Investment 15 15 15 15 Future value Aer 15 Years Rs. 3172169 4177248 5473566 8137062 Due to market condions if the balance of asset mixes changes the fund manager has to rebalance it at regular intervals. This way he can book profits from both asset classes. 11

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Cost of Delay Just delaying the decision of doing a SIP of Rs 10000 per month generang 15 CAGR return for 12 months only will cost you Rs 916600.00. Your End Investment Value if you had started MF SIP today …Rs 6163656.Your End Investment Value if you delay your SIP decision just by 12 months…5247056.The cost of delay is Rs 916600. If you delay your investment by 12 months you stand to lose Rs. 916600/‐ in the end value of Childs Higher Educaon Goal. Procrasnaon is only route cause for this loss due to a delayed decision. You may delay but me will not and lost me is never found again. “The really happy people are those who have broken the chains of procrasnaon those who find sasfacon in doing the job at hand. Theyre full of eagerness zest and producvity. You can be too.” “Procrasnaon is the bad habit of pung off un l the day aer tomorrow what should have been done the day before yesterday.” — Benjamin Franklin – Napoleon Hill – Norman Vincent Peale 12

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d Invest Regularly SIP Systemac Investment Plan is a gi for serious investors. A SIP lives the thought of Compounding Interest which Albert Einstein declared as the 8th wonder of the world. In the long run a SIP is capable of generang consistent returns thus creang wealth for all financial goals. Cessaon of SIP in a mid‐way will cost a lot People get tempted or harassed due to volale returns generated by a SIP in any equity oriented Mutual Fund Scheme and intend to cease it in a mid‐way. That proves to be a fatal way to the investment goal. If so ever a SIP is connued unl the end of the period the result remains miraculous. In the below chart if somebody had started a SIP for ten years his term value of an investment will be Rs 2630182 and if he disconnued it aer 5th year he would be le with Rs 873421 only. Execuon and revising the plan Once childs Educaon plan is ready execute it immediately without procrasnaon. Revisit the plan is most important aer execuon. Whenever there is a change in the financial life of a person like the birth of another child or promoon or any loss of a job or anything other than this he should immediately call the financial planner. Revisit the plan. Reset and reassess the goal if needed. Even as the goal maturity me is nearing he may need to change the allocaon paern of asset classes. 10 Expected End Value of your Investment For A Monthly Investment SIP of Rs.10000/‐ Number of Years of Investments 5 10 15 20 25 30 771717 2014576 4016212 7239867 12431596 20792927 12 15 20 811036 873421 987040 2240359 2630182 3443110 4759314 6163656 9554599 9198574 13270734 24761940 17022066 27565608 62602670 30809732 56317704 156762515 Exp. Returns 13

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d The Extra Degree Are you looking to make that extra step forward thats going to make you accomplish your dreams Yes Only one extra effort is needed. Water boils at 211 degrees temperature and the just extra 1‐degree addion of temperature to it converts boiling water to steam and this steam can do a miracle. This steam has now power to pull or push thousands of tons heavy locomoves or a steamer. The same way one has to change the atude just 1 degree and it will change the rules of the game and change the focal point. Just 1 degree more and the target is yours. With just 1 degree extra effort a Gold Medalist Runner has been able to beat silver medalist by just .87 seconds and the winner was able to pocket 6 million dollars extra as prize money. Here is a table below you can see how 1 percent change of compound interest is going to change the rule of the game in life. Just imagine a newly born child is there in your home. You certainly know the present cost of Higher Educaon is Minimum Rs 1000000.00 today and you will need a big chunk when he or she actually will to go for it. In the table below just see how the different rate of per year compounding interest rate impact the final value aer 18 years. 14

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d 1000000 4 2025816.52 1025816.5 1000000 5 2406619.23 1406619.2 1000000 6 2854339.15 1854339.2 1000000 7 3379932.28 2379932.3 1000000 8 3996019.5 2996019.5 1000000 9 4717120.42 3717120.4 1000000 10 5559917.31 4559917.3 1000000 11 6543552.91 5543552.9 1000000 12 7689965.8 6689965.8 1000000 13 9024267.97 8024268 1000000 14 10575169.2 9575169.2 1000000 15 12375453.6 11375454 1000000 16 14462514.5 13462514 1000000 17 16878953.3 15878953 1000000 18 19673250.9 18673251 Present value A Rate of Compound Interest Per Year B Final Value aer 18 years C Net Profit C ‐ A Present value A Final Value aer 18 years C 15

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d In present day most of Savings Accounts with Public Sector Banks give 4 rate of compound interest if money lies there for more than one year. If by ignorance or by will Mr. Amit keeps Rs 1000000.00 into his savings account for his daughters higher educaon ll she turns 18 certainly his money will fetch another Rs 1025816.52. Mr. Ashutosh was smarter and he planned this saving with some private sector bank and was able to bargain at 6. This 6 of compound interest put him at the difference of Rs 1406619.23 only. When he calculated the real rate of return aer deducng Inflaon and taxaon he lost the ground. The amount he achieves was altogether negave. This is the story most of us find in real life. We dont understand the impact of Inflaon and taxaon on our investment. We are innocent enough not able to calculate compounding impact both dreadful elements of finance ‐ Inflaon and taxaon. Silver line in the clouds Childrens Funds HDFC Childrens Gi Fund‐ Investment Plan Equity Oriented HDFC Childrens Gi Fund‐ Savings Plan Debt Oriented ICICI Prudenal Child Care Plan‐ Gi Plan Equity Oriented ICICI Prudenal Child Care Plan‐ Study Plan Debt Oriented Incepon Date 2‐Mar‐2001 2‐Mar‐2001 31‐Aug‐2001 31‐Aug‐2001 5 yr CAGR 16.95 As on 07/04/2017 11.22 As on 07/04/2017 17.33 As on 07/04/2017 15.35 As on 07/04/2017 10 yr CAGR 15.51 As on 07/04/2017 11.21 As on 07/04/2017 12.41 As on 07/04/2017 12.63 As on 07/04/2017 16

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SWARAJ WEALTH Y o u r I n v e s t m e n t F r i e n d You can beat Inflaon and taxaon. Just beat compounding impact of these two with compounding rate of Return and Tax Efficiency. Some of the Children Funds Name of schemes may be like – Child Care Plan Childrens Gi Fund Bal Vikas Yojana etc. from Mutual Funds provide booster power to your investment planning. They have a most appropriate mix of asset classes i.e. every me they maintain more than 65 of its investment in Equity thus able to the benefit of Secon 1038 ITA. Means any me aer 365 days of investment profits from such schemes will be 100 tax‐free. At the same me over long periods such schemes have been able to generate returns over and above of inflaon which is the need of the day. I hope this ebook has dissipated many myths related to the savings for Child Educaon. I do hope that you are movated to plan for future right now with determined efforts. Want to know more and understand how you can save given your financial scenario Get in touch : Contact : Email : Address : Facebook : Childs Higher Education Written By Ajay Kumar Jain CMD Swaraj Wealth Management Pvt Ltd 9993025625 rd 3 Floor Shri Ram Tower Ekta Chowk MR‐4 Jabalpur 18

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