Preface Contents

Money Financial planning for your children is probably

something that takes up a lot of your 'worrying' time.
Why plan for your child's future? ------------------------------------------------------- 3

Simplified You know that you need to start setting aside money
for your child's needs. But what you do not know is the
Case Study: Planning for child's education -------------------------------------------- 4

Planning your ideal way to go about doing the same. Add to that the Child Plans: Securing your child's future ----------------------------------------------- 8
child’s future 'noise' about the various investment products designed
to meet a child's needs and you are left grappling with Child Plans: A comparative analysis -------------------------------------------------- 11
Copyright: more than you can handle.
Mutual funds for your child ------------------------------------------------------------ 16
At Personalfn, our experiences with parents who wish
to plan for their child's needs are wide and varied. In Evaluating child funds ------------------------------------------------------------------ 19
Quantum Information most cases we find that the parent has already embarked
Services Pvt. Ltd. on a financial plan by setting aside some money for Equities and Your kid(s) - Do's and Don'ts ------------------------------------------- 22
his/her child. However, usually this money is invested
Websites: in avenues that are not the most suited for such a "Assure" your child's future ----------------------------------------------------------- 23
www.personalfn.com financial plan. Moreover, the allocation of these
www.equitymaster.com savings to various asset classes tends to be lopsided. 5 steps to plan for child's future ------------------------------------------------------- 30
In short, few parents can be said to have planned well
Contact Information: for their children.
Quantum Information
Services Pvt. Ltd., At the other extreme are parents, who are yet to start
404, Damji Shamji planning for their child's needs. If the parents have
Vidyavihar (W), time on their side, the entire financial planning exercise
Mumbai - 86 India becomes a lot more manageable; else, it becomes a
financial burden, which is difficult to do away with.
Email:
info@personalfn.com In this issue of the Money Simplified, we handhold
you through the entire process of financial planning
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Content:
Abhijit Shirke Team Personalfn DISCLAIMER
Himanshu Srivastava 20th July, 2006 This booklet a) is for Private Circulation only and not for sale. b) is only for information purposes and Quantum Information Services
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 Why Plan?
Importance of planning for your child's future
The dynamics of planning for the child's
future have changed radically over the
years. The conventional method of
providing for the child was to simply set
aside some money in a savings bank
account. These funds would then be
utilised for the child's life stages. At best,
parents would make investments in fixed
deposits with the intention of providing
from the maturity proceeds. However, it
would be safe to say that such an
approach is not only outdated, but also
inadequate in the present scenario.
Inflation or a general rise in prices can
be credited as the single largest
contributor for this situation. None of
the areas like education, marriage or
even one's lifestyle are left unscathed
by rising prices. Hence it is imperative
that parents account for this
phenomenon while providing for their
children.
An example should help us explain this
better. Assume that a 2-year MBA
program in a leading business school
costs Rs 500,000 at present. Your child
is 5 years old now and will pursue the
management degree at the age of 20
years. This gives you a time frame of 15
years. Assuming that the inflation rate
is 10% per annum, the education would
cost Rs 2,088,624. Now that seems a
handful, doesn't it?
However, if you have an investment plan
in place, this target can be easily
achieved. Now that you are aware of the
sum required to ensure that your child
3 visit us at www.personalfn.com
can pursue his higher education, the next
step is to make investments to meet that
target. Let us assume that investments
are made in well-managed diversified
equity funds or ULIPs (which are
predominantly invested in equity) which
yield a return of 12% CAGR
(compounded annualised growth rate)
over the 15-Yr period. This would entail
investing around Rs 4,400 per month.
That doesn't seem too tough, does it?
Even if your objective is to provide for
your child's marriage, property or seed
capital for a business venture for your
child, the above approach holds good.
The key lies in identifying each objective
that you wish to provide for in an
unambiguous manner and then
quantifying it. You should have multiple
investment portfolios, each catering to
an earmarked objective. The next step is
to engage the services of an expert
investment advisor who can help you
manage the investments and achieve the
goals defined by you.
Children and their well-being often rank
as the highest "priorities" for parents
and words like "only the best for my
child" are rather common. However just
having your heart in the right place isn't
sufficient. Instead what you need is a
practical approach to ensure that you
work towards providing your child with
a financially secure future.
And that just might be the best present
you will ever gift your child!
Why MidStudy
Case Caps?
Case Study: Planning for child's education
As a parent, you generally plan from the
perspective of making funds available
to your child for -
a. Education
b. Marriage
c. Seed capital for business
While the need for education is
universal, the desire to provide for
marriage-related expenditure and seed
capital to your child for business is
perhaps more relevant in the Indian
context. In this note, we will focus our
discussion on how you, a parent, can
go about planning for your child's
education needs, since it is the most
critical of the three objectives we have
outlined above.
Before venturing any further, it is
pertinent to note that financial planning,
be it for your child or for your retirement
or for any other need, is a very
personalised activity. It will work best
for you only if there is customisation to
suit your exact needs and profile. Also
to be noted is the fact that financial
planning is not a one-time activity. In
fact it will be fair to say that making of
the plan is only the start of what is going
to be an ongoing activity for many years
to come.
Let's say you wish to plan for your
child's education needs; your child is
likely to go to college 15 years from
now. The following is what you desire
and/or expect -
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1. Provide funds both for graduation
(let's say engineering) and post-
graduation expenditure (a management
course)
2.You wish to provide for not just the
course fee but also the living expenses
during the 5 - 7 years of study
3.Your child is expected to study in India
and therefore no need to factor in
currency risk
4.You expect the course fee and the
living expenditure to inflate on an
average by 10% pa (per annum) over the
years
Given this information and also some
more regarding any monies that you have
already invested for the purpose of your
child's education, one can help draw up
a financial plan that will help you fulfill
this objective.
As mentioned earlier, financial planning
is a very personalised activity. The
reason is that each individual's needs
are to be seen in the context of his risk
appetite, expectation of returns, cash
flows and other financial commitments.
In our case study, we have provided
solutions for broadly three types of
parents - one, who can take considerable
risk; two, who have a moderate risk
profile and three, the risk averse parent.
Naturally, the parent, who is willing to
take higher risk, should ideally be
compensated by a higher return, the
assumption being the investments are
made wisely (irrationally investing in
risky assets will get you nowhere). Such
4
 Case Study
a parent's portfolio will have a higher
concentration of risky assets like equity
mutual funds or Unit linked Insurance
Plans (ULIPs) with high equity exposure.
The portfolio will also have an exposure
to assets that carry lower risk, which will
in effect reduce the overall volatility of
the portfolio. Such a portfolio, we
believe, can earn a return of about 15%
CAGR (Compounded Annual Growth
Rate).
At the other extreme is a risk-averse
parent, who is investing only in schemes
that are backed by the Government of
India like the Public Provident Fund
(PPF) and the National Savings
Certificate (NSC). Alternatively one can
invest in mutual funds and ULIPs, which
invest in Government of India debt
instruments. In case of PPF the return
(presently 8% pa) is reset every year and
there is a limit to how much one can
invest in a year; but then all income is
tax-free. In the case of NSC or other
deposits the rate of return is locked, but
the income earned is taxable (post tax
rate is about 5.3% for the parent in the
highest tax bracket). A portfolio of these
schemes (some tax-free, some not) can
in our view earn a return of about 5.5%
CAGR over the investment horizon. Any
change in taxation laws will definitely
have an impact on these returns (there
is a proposal pending for making interest
income from the PPF taxable).
The parent with a moderate risk appetite
should have a combination of risky
assets like equity funds (or stocks) and
less risky assets like deposits and bonds.
Since the tenure of investment is usually
over ten years, the allocation to riskier
5 visit us at www.personalfn.com
Case Study
assets should ideally be higher; the The solution actually is very Financial planning for your children is
exact allocation will depend on the manageable. For a parent with a high not a difficult task. If you are disciplined
parent. We have assumed that a risk appetite, the money that needs to in executing your financial plan,
moderate risk portfolio can yield about be set aside every month is just Rs reviewing it from time-to-time and making
12% CAGR. 11,042! Of course, this money needs to adjustments whenever necessary, there
be invested in a portfolio that comprises is little reason that you will miss your
For the sake of simplicity we have various asset classes in a predetermined target. But this is easier said than done.
assumed that these portfolios are owned proportion as discussed earlier. As a parent you will need to block out a
till the day the money is needed. Ideally, Naturally, the parent with the lowest risk lot of the noise out there pertaining to
there needs to be de-risking of the appetite will need to set aside more this new investment opportunity or that;
portfolio as the investment tenure money to accumulate the same sum. remember your child's future is at stake.
comes to an end. About three years prior
to when the money is needed one
should, in our view, take measures to
de-risk the portfolio. And then again, all
the money will not be withdrawn at one
point in time; so part of it that is not
withdrawn will continue to earn a return.
This will have an impact on the overall
financial plan (though partially these
two points will offset each other). Ensure
that your financial planner factors these
points in.
Another factor that a parent needs to
keep in mind is that he/she needs to
allocate monies to various asset classes
in a predetermined ratio to ensure that
the objectives of the portfolio are met.
Any solution where all the money is
invested in one asset class is not an
advisable proposition.
Coming to the solution, the first number
that hits you in our table is the 'inflated'
cost of education and living expenses
15 years from now. Indeed, if seen in
isolation, you might almost give up in
terms of ever having enough money to
provide for your child's education need.
However, what appears impossible is not
really so.
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 Case Study Child Insurance
Solution for Child Planning - Education Child Plans: Securing your child's future
Case 1 Case 2 Case 3
Life insurance plays an important role in that the individual will have to pay for
Aggressive Moderate Govt Sch. an individual's financial planning the plan is approximately Rs 34,750 per
exercise. Insurance can assist annum (pa). In case of an eventuality to
Cost of College Education today* Rs 2,000,000 2,000,000 2,000,000 individuals in planning for their own life the individual, his nominee will receive
Time to College yrs 15 15 15
stages as well as provide for their child's the sum assured (i.e. Rs 500,000) plus
future. Various types of child insurance declared bonuses if any.
Expected inflation in fee % 10.0 10.0 10.0
products are available in the market In case of survival, as per the terms of
Expected Cost of College Education Rs 8,354,496 8,354,496 8,354,496 today. Individuals need to understand the money back policy, the parent will
these products better so they can make receive an amount of Rs 125,000 pa when
Money you have already set aside… Rs 200,000 200,000 200,000 an informed decision.
Table 2
Existing assets will grow at…(Post tax) % 15.0 11.5 5.5
Child insurance plans help in addressing End Guaranteed Bonus Total
Value of existing assets then Rs 1,627,412 1,023,654 446,495 of year amount amount amount
the child's future needs such as
Therefore, net to be accumulated Rs 6,727,084 7,330,843 7,908,001 (Rs) (Rs) (Rs)
education, marriage or even building
15 125,000 0 125,000
seed capital for future business
16 125,000 0 125,000
Solution purposes. They do this by way of
helping parents build a corpus for their 17 125,000 0 125,000
Case 1 Case 2 Case 3
children. An illustration will help in 18 125,000 225,000/ 350,000/
Aggressive Moderate Govt Sch.
understanding this better. 360,000* 485,000*
Monies to be accumulated… Rs 6,727,084 7,330,843 7,908,001 *Amounts are calculated at 6% & 10% returns.
Assumed Return (Pre tax) % 15.0 12.0 8.0 Table 1
Age Sum Tenure Premium his son attains 18 years, 19 years, 20
Assumed Return (Post tax) % 15.0 11.5 5.5
(Yrs) assured (Rs) (Yrs) (Rs) years and 21 years of age. This plan will
Tenure yrs 15 15 15
35 500,000 18 34,750 help the individual take care of his child's
Annual Saving Required Rs 141,383 204,709 352,899
education expenses. As subsequent
Or simply, Monthly investment of Rs 11,042 16,221 28,692 Let us consider a 35-year old parent who proceeds mature, they can fund the
Or a one-time investment of Rs 826,722 1,432,290 3,542,255 has a 3-year old child. The individual child's education on an ongoing basis.
wants to insure himself for a sum of Rs
500,000 so that when his son is 21 years In addition, on maturity of the policy
* Includes combined fee and monies for living for an Engineering and an MBA course old he can avail of the maturity (which will coincide with the son
from a rated institute in India proceeds. He selects a policy with an attaining 21 years of age), the parent will
Tax Rate assumed at 30% plus applicable surcharge 18-year tenure. In addition to the amount also receive the declared bonuses
at maturity, the individual also wants to alongwith the regular payout. In our
receive fixed amounts at regular intervals example, he will receive approximately
from his insurance plan to take care of Rs 225,000 (calculated @ 6%) or Rs
his son's education. For this reason, he 360,000 (calculated @ 10%) as bonus
opts for a money back plan. additions on maturity.

As Table 1 shows, the insurance premium This is how money back plans work.

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 Child Insurance
Broadly speaking, money-back
insurance plans are variants of the
endowment plan. Parents can also opt
for regular endowment child plans,
which offer a lumpsum amount on
maturity as opposed to regular payouts
under the money-back type of child
plans.
Child plans come in two broad variants -
regular endowment child plans and unit
linked insurance plans (ULIPs). The
primary difference between the two lies
in the way they invest their premium
monies. Regular endowment plans
invest a major portion of their money in
debt instruments like corporate bonds
and government securities (as specified
by the regulator). Conversely, ULIPs can
invest across equity and debt markets
in varying proportions. Table 1 was an
example of a conventional endowment
child plan. Now let us consider the
working of a ULIP child plan.
Let us take the case of a parent aged 33
years who has 4-month daughter today.
The parent has opted for a ULIP child
plan with a sum assured of Rs 50,000 for
a 20-Yr tenure. This plan gives him a
lumpsum on maturity. The annual
premium payable for the same is Rs
10,000. As Table 3 shows, in case of an
eventuality, the nominees stand to
receive Rs 50,000 (i.e. the sum assured).
Table 3
Age of parent Sum assured Tenure Annual premium Death benefit
(Yrs) (Rs) (yrs)
33 50,000 20
*Amounts are calculated at 6% & 10% returns.
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The lumpsum receivable on maturity of
the policy in case the individual survives
the tenure is approximately Rs 316,848
(assuming returns @ 6%) or Rs 497,474
(assuming returns @ 10%). The
lumpsum payout will help the individual
in funding say, his daughter's marriage
when she is 21 years old.
Parents have a choice; they can either
opt for a regular endowment plan which
carries relatively lower risk since it is
invested mainly in corporate bonds and
government securities. The bonuses are
stable and give the parent considerable
comfort knowing roughly how much he
can expect. Regular endowment plans
are suited for parents with a low risk
appetite.
Parents with some risk appetite can opt
for a ULIP child plan that invests across
equity and debt markets. The reason why
ULIP child plans can prove to be
significant is because over the long-term
(15-20 years), equities can add
considerably to the corpus you plan to
build for your child's needs. In our view,
equities are best placed to beat inflation
over the long term. However, to achieve
this one must invest wisely. Debt on the
other hand brings stability to a portfolio.
While the returns for debt at times may
seem unattractive as compared to
Maturity Benefit
(Rs) (Rs) (Rs)
10,000 50,000 316,848/ 497,474*
equities, their importance in a portfolio
(mutual funds, ULIP) cannot be
understated.
ULIPs have several important features
that should make parents sit up and take
notice:
1. They are very flexible; most ULIPs
(including child ULIPs) offer several
options to parents with varying risk
profiles. Parents can shift across options
depending on their view on debt and
equity markets. For instance, if equity
markets appear over-heated, a portion
of the ULIP money can be switched to
the debt/lower equity option.
2. If you have got a large sum of money
(annual bonus, for instance) that you
wish to set aside for your child's future,
you can invest it in the ULIP. This amount
is over and above the annual premium
on ULIP. It's referred to as the top-up
premium and is specific to that year only;
you don't have to necessarily
match that amount next year.
3. ULIPs generally incur lower expenses
than regular endowment plans. In most
cases the sales and marketing costs of a
ULIP are lower than of endowment plans.
Lower ULIP expenses means that a larger
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Child Insurance
sum of money is being invested towards
your own child's future and not towards
the future of your insurance agent's
child.
4. ULIPs often disclose their portfolios
at regular intervals (monthly, quarterly),
so you have a fairly good idea about
where your money is being invested.
Parents should consider taking on some
risk (by investing in equities) to beat
inflation, which is the main reason the
cost of everything right from your child's
education to his marriage is forever
spiralling. Over a 15-20 year time frame,
if wisely selected, a ULIP even with
moderate equity allocations could add
considerably to your child's corpus. In
our case study 'Planning for child's
education', we have outlined how the
presence of equities in the portfolio for
your child's future, can help you achieve
that magic figure for your child's
education.
Life insurance has much to offer to
parents looking to accumulate wealth
for their child's future. There are several
plans offering enough flexibility to help
parents with the same. It all boils down
to making the right choice in
consultation with your financial advisor.
10
 ITC
Comparing Child Plans
Child Plans: A comparative analysis
Child insurance plans have traditionally
played an important role in securing the
child's future. However, with a plethora
of children insurance plans available in
the market, it becomes difficult for
individuals to evaluate them objectively.
We have done an overview of children
plans from leading life insurance
companies.
Unit-linked child plans
1. HDFC (Young Star Plus)
The Young Star Plus from HDFC
Standard Life is a flexible unit-linked
children's plan. There are six fund
options available to the policyholder
under this plan. The plan is designed to
give the individual the flexibility to select
an option with anywhere between 0%
to 100% equity allocation depending
upon his risk appetite.
In terms of initial policy expenses, ULIPs
from HDFC Standard Life are expensive/
cheap depending on the premium
amount. The range varies from 10%-60%
of first year's premiums. However, in
terms of fund management charges
(FMC) it is among the most cost effective
at 0.80% per annum (pa) across all fund
options; likewise even the monthly
charges are competitive at Rs 20 per
month (pm). Another positive is that it
allows upto 24 free switches across
options in a year. It also permits the
individual to make a maximum of 6 free
withdrawals pa.
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2. ICICI PruLife (SmartKid New Unit-
linked Regular Premium)
SmartKid is a flexible education
insurance ULIP from ICICI PruLife. It is
available with four fund options ranging
from 0%-100% equity. A noteworthy
point is that while its 'most aggressive'
option can invest in the range of 75%-
100% in equities, the 'next best' option
(in terms of aggression) i.e. the 'Balancer
II' option can invest only upto a
maximum of 40% in equities. The monthly
charges (at Rs 60 pm) are on the higher
side, but are offset by low premium
allocation charges of 18%-20% in the
first year going down to 1% after ten
years. Also, the minimum withdrawal
amount at Rs 2,000 is the lowest in our
sample, which gives that much more
flexibility to the parent. The plan is the
only one to offer an income benefit rider,
which pays 10% of the rider sum assured
to the child, every year till maturity, in
the event of the parent's death.
3. Tata-AIG (Invest Assure II)
The ULIP offers flexibility in terms of
allowing investments in equities in the
0%-100% range. However, the fund
management charges are relatively steep
- as high as 1.60% for the 'Aggressive
Growth' option and 1.75% for the 'Equity
Fund'. Also, the tenures available are
limited; only 3 tenure options are
available - 15 years, 20 years and 30 years.
Individuals cannot opt for say an 18-
year or a 25-year tenure.
Comparing Child Plans
4. Aviva (Young Achiever)
Young Achiever is a unit linked child plan
from Aviva life. It is available in three
options ranging from 0%-85% in equities.
This child plan affords individuals with
a low minimum premium amount (Rs
6,000) and a low minimum withdrawal
amount (Rs 5,000). The top-up amount
too at Rs 1,500 is the lowest as compared
to the other plans in the table. However,
for individuals with a high-risk appetite,
this plan puts a cap on its equity
investments at 85% in its most
aggressive fund option. On the flipside,
this can help the fund in 'limiting' its
losses during a bear phase.
Regular Endowment-based Child Plans
1. Life Insurance Corporation-LIC
(Jeevan Anurag)
Jeevan Anurag is a regular child plan
from LIC based on the money-back
platform and offers payouts at regular
intervals (i.e. money-back policy). The
payouts begin in the last four policy
years- 20% of the sum assured is paid
out in each of the three years preceding
the year of maturity. In addition, 40% of
the basic sum assured alongwith
bonuses if any, are paid out in the last
year i.e. on maturity. In case of an
eventuality, the sum assured is paid out
to the nominee and the plan continues
with the regular payout benefits intact.
The minimum sum assured at Rs 50,000
is low for this plan thereby making it an
affordable one for individuals.
2. HDFC (Children's Plan)
The regular child plan from HDFC
StanLife is a flexible plan in that it offers
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three choices to cover the individual in
a single plan- they differ primarily with
respect to the 'benefits' in case of an
eventuality. Under the 'Accelerated
Benefit' option, in case of an eventuality,
the sum assured (SA) alongwith
bonuses if any, are paid out to the
nominees and the policy terminates
immediately; under the 'Maturity Benefit'
option, the policy continues in case of
an eventuality but the nominees do not
have to pay any further premiums; under
the 'Double Benefit' option the SA is
paid to the nominees and the policy also
continues in the insured' absence. The
minimum premium for this plan at Rs
1,800 is also on the lower side.
3. ICICI PruLife (SmartKid Regular
Premium Plan)
The regular premium child plan from
ICICI PruLife is based on the money-
back platform in that it offers payouts at
regular intervals. Two payout options
are made available to the individual - one
option gives the individual payouts
over the last five years of the policy;
the second option allows the individual
to receive payouts at specific intervals,
which may coincide with the
educational needs of the child. The
minimum premium at Rs 8,400 is on the
higher side as compared to the other
plans in the table.
4. Bajaj Allianz (ChildGain)
The ChildGain plan from Bajaj Allianz is
a child plan based on the money-back
platform and which offers payouts at
regular intervals. The tenure in this plan
is 21 minus age of child at entry (for
ChildGain 21 and ChildGain 21 Plus) and
12
 Comparing Child Plans Comparing Child Plans
Child ULIPs: How they face off
HDFC ICICI PruLife Tata-AIG Aviva
HDFC ICICI PruLife Tata-AIG Aviva (YoungStar Plus Plan) (SmartKid New ULRP) (InvestAssureII) (Young Achiever)
(YoungStar Plus Plan) (SmartKid New ULRP) (InvestAssureII) (Young Achiever)
Min. 10,000 2,000 10,000 5,000
Minimum 10,000 10,000 - 6,000 withdrawal
Premium (Rs) amt. (Rs)
How is Sum Annual premium X Annual premium X Multiple of annual 6-21 times
Assured (term/2)(subject to (term/2)(subject to premium. Varies as annual
Calculated min. 100,000) min. 100,000) per age & term premium Initial years' 10-60% in the 18-20% in yr 1 17.50%-50.00% in 10% of initial units
expenses first year (depends upon annual yr 1; 12.50-25.00% + 5-8% of annual
Fund Option Liquid Fund ,Secure Preserver, Protector II, Short-term, Fixed Protector Fund (depends uponthe premium amt); in yr 2 (exact premium (exact
available Fund,Defensive Fund, Balancer II, Maximiser II Income Fund, Balanced Fund, annual premium amt) 5% in yrs 2-5; %age depends %age depends
Balanced Fund, Stable Growth Fund, Growth Fund. 2% in yrs 6-10 upon age of individual upon annual
Equity Fund, Growth Aggressive Growth & tenure of plan) premium)
Fund Fund, Income Fund,
Equity Fund.
Allocation to 0% in Liquid Fund & 0% in Preserver & 0% in Short-term 0-20% in Prot. Expenses 1 1 1 -
Equities Secure fund, 15-30% Protector II, 0-40% fixed income Fund, Fund, 0-45% in after initial
in Defensive Fund, in Balancer II, 30-50% in Stable Bal. Fund, years (%)
30-60% in Balanced Fund, 75-100% growth Fund, 75-100%
60-100% in Equity Fund, in Maximiser II 50-80% in Aggressive 30-85% in Fund Mgmt. 0.80% across 0.75% for Preserver 0.90% for Short 1.00% for Protector;
100% in Growth Fund Growth Fund, 0% in Growth Charges funds & Protector II;1.00% for term fixed income; 1.25% for
Income Fund, Fund Balancer;
100% in Equity Fund Balancer II;1.50% for 1.25% for Income; 1.50% for Growth
Maximiser II 1.40% for Stable
Minimum 5,000 - 10,000 1,500 growth; 1.60% for
Top-up Aggressive growth;
amt (Rs) 1.75% for Equity
Min-Max 10-25 10-25 3 tenures 8-21
tenure (Yrs) 15/20/30 yrs
Administration 20 60 38 55
Min-Max 18-65 20-60 30 days - 21-55 Charges per
age at Entry (for the parent) (for the parent) 45/55/60 years month (Rs)
(Yrs)
Switch details 24 free switches Upto 4 free switches per Upto 4 free Upto 2 free
Max. age 75 75 - 65 per annum. annum. Rs 100 switches per Switches
at maturity Rs 100 per per switch thereafter annum. Rs 250 per annum
(Yrs) switch thereafter per switch thereafter 0.50% of the
switch amt
Settlement Maturity value can Maturity value can be Maturity value can be Will be settled thereafter
Option be withdrawn either as withdrawn either as withdrawn either as per the rules
lumpsum or in lumpsum or in lumpsum or in prevailing during Partial Upto 6 Max. 5 w/d Upto 4 w/d Only 1
'installments' for upto 'installments' for upto 'installments' for upto maturity withdrawals(w/d) w/d allowed during the allowed per annum w/d
5 yrs after maturity 5 yrs after maturity 5 yrs after maturity details free per annum. entire policy term allowed in
Rs 250 per w/d a policy year.
Surrender/ Yes. After min. Yes. After min. Yes. After min. Yes. After min. thereafter
Withdrawal 3 completed 3 completed 3 completed 3 completed
allowed years from having years from having years from havingyears from having Who is Parent Parent Child Parent
bought the plan bought the plan bought the plan bought the plan insured?

13 visit us at www.personalfn.com visit us at www.personalfn.com 14

 Comparing Child Plans ITC
Mutual Funds
Endowment ULIPs: How they face off
Mutual funds for your child
LIC HDFC ICICI PruLife Aviva
(Jeevan Anurag) (Children's plan) (SmartKid - (Young Rarely have we seen a time when parents retirement, an overseas trip, parking
Regular Prem) Achiever) were overwhelmed with so many surplus money. For parents, this
investment options to help them plan for objective can be 'planning for child's
Type Money-back Regular Money-back Money-back
their children's future. It is equally true education or marriage or seed capital for
of Plan endowment plan endowment plan endowment plan endowment plan
that often parents find themselves so his/her business'.
Minimum - 1,800 8,400 5,000 preoccupied that they can't seem to find
Premium (Rs) time to manage their own commitments, Parents must note some peculiar feature
let alone plan for their children's of child funds. These features tell
Minimum Sum 50,000 100,000 100,000 100,000 education and marriage among other parents exactly what makes these funds
Assured (Rs)
events. That is why it is important that tick. It gives them a reason to consider
Tenure (Yrs) 10-25 10-25 10-25 *Depends upon they get some professional help. This is these plans for building a corpus for their
plan type where mutual funds come in. children's future.

Min-Max age 20-60 (parent)
at entry (Yrs)
Max. age 70
at maturity (Yrs)
Who is insured? Parent
*21 minus age of child at entry or 24 minus age of child at entry
24 minus age of child at entry (for
ChildGain 24 and ChildGain 24 Plus).
Also, the regular payouts under the
ChildGain 21 and ChildGain 21 Plus take
place following the child completing 18-
Yrs, 19-Yrs, 20-Yrs and 21-Yrs of age
respectively. For the ChildGain 24 and
ChildGain 24 Plus, the payouts happen
18-60 (parent) 20-60 (parent); 20-50 (parent); Put simply, mutual funds hire the
0-12 (child) 0-13 (child)
services of a professional money
75 70 - manager to invest on behalf of a group
of individuals. The individuals pool in
their savings and leave it to the fund
Parent Parent Child manager to manage their money in an
optimal manner. Individuals can go about
their work as usual, content in the
on the child attaining 18-Yrs, 20-Yrs, 22- knowledge that there is professional
Yrs And 24-Yrs respectively. help at hand.
The information here is sourced from Mutual funds have much to offer to
company websites and product parents. Consider this - you have office
literature. Individuals are advised to work to complete, household work to do,
contact the company for further details. children's homework to help with and
whole lot of other social and personal
commitments to take care of. In the
middle of all this, where is the time to
invest for your child's education or
marriage or business?
Say hello to child plans/funds. We
mentioned that mutual funds invest on
behalf of individuals to achieve a pre-
determined objective. For many investors
this objective is planning for a house,
1. Investment objective
The good news for parents is that there
is common ground between their
objectives and the objectives of child
funds. Child funds are launched with the
explicit objective of helping parents
build a corpus. Sample this - Principal
Child Benefit's investment objective
reads - 'To generate regular returns and/
or capital appreciation/accretion with the
aim of giving lumpsum capital growth at
the end of the chosen target period or
otherwise to the Beneficiary (child).'
Even more explicit is UTI Children Career
Plan's investment objective - 'to provide
children after they attain the age of 18
years a means to receive scholarship to
meet the cost of higher education and/
or to help them in setting up a
profession, practice or business or
enabling them to set up a home or
finance the cost of other social
obligation.'

15 visit us at www.personalfn.com visit us at www.personalfn.com 16

 Mutual Funds
2. Asset allocation
Although most child funds take on a
degree of risk by investing in stock
markets, they are relatively less risky
compared to diversified equity funds
that can invest upto 100% of their assets
in equities. They are relatively less risky
because fund houses have taken
adequate measures to ensure that child
funds are managed conservatively.
The most important measure adopted by
fund houses is to cap the equity
investments at a reasonable level. Most
of them have capped the equity
weightage of the portfolio at varying
levels, usually not exceeding 70% of the
net assets. These funds have the
flexibility to invest in equity and debt
markets depending on the fund
manager's view on these markets. These
funds work like asset allocation plans
allowing the fund manager to shift across
asset classes so as to maximise returns
for the investor. For instance, in an equity
fund the fund manager is usually
compelled to remain completely invested
in equities even when stock markets
appear overvalued and therefore poised
for a correction. But a child fund with a
cap on the equity component can always
shift a portion of its assets in debt when
the going gets rough.
On the same lines when equity markets
are overvalued, the fund manager can
shift a portion of his assets to debt so
as to capture gains. When equity
markets decline, he can add to the equity
component. By smartly allocating assets
across debt and equities, he can ensure
17 visit us at www.personalfn.com
Mutual Funds
that he enters low and exits high, the For parents who want to build a corpus As parents will appreciate, child funds
cornerstone of a successful investment for their children over the long-term, a have a lot of features working for them.
strategy lock-in must be seen as an ally for two Even if some of these features appear
reasons. One, it enables the fund restrictive in nature (cap on equity
3. Lock-in manager to make investments that are in investments, lock-in period) remember
We mentioned that fund houses make the investor's long-term interests. over the long-term they work to the
provisions to ensure that the risk Second, it acts as a deterrent for the parent's benefit. They instill discipline
associated with child funds is controlled. parent from making premature and have the potential to generate a
One way to lower the risk of equities is withdrawals. corpus for the child and in the final
to make long-term investments. Over the analysis that is all that matters.
short-term equities are the riskiest
assets; over the long-term, if you tread
wisely, they can generate the best risk
adjusted returns for you. That is just
what fund houses do; they give the fund
manager the time and flexibility to make
really long-term investments in the child
fund. For that, they have what is
commonly referred to as a lock-in period.
If you are an investor in PPF (Public
Provident Fund) and NSC (National
Savings Certificate) then you already
know what a lock-in period means. In
fact, fixed deposit (FDs) investors are
equally aware of this term. Only
difference is that child funds have an
equity flavour, while NSC, PPF and FDs
are debt instruments. Reason why it
makes imminent sense for equities to
have a lock-in is because they
demonstrate their potential over the long
term (at least 3 years in our view). When
the fund manager is certain that he can
invest the money for a longer period of
time without being concerned about the
investor standing outside his office
demanding his money, he can make more
prudent investments that stand a good
chance of making money over the long-
term.
visit us at www.personalfn.com 18
 ITC
Evaluating Child Funds
Evaluating child funds
As we mentioned in the previous article,
mutual funds could easily rank as the
most convenient way to accumulate
wealth for your child's future. But that
in itself is not a sure-fire way to make
great money. You still have to make the
right choices and select the right child
funds. In other words, you are still a step
away from getting your child the best
education. After reading this note, you
will have bridged that gap.
Given the emotional appeal associated
with child funds, a lot of AMCs (Asset
Management Companies) have a child
fund in their portfolios. So parents have
adequate options over there. But
adequate options bring with it the
responsibility to make the right choice.
For parents, making the right choice is a
two-fold process. The first step does not
have so much to do with the mutual fund,
as it has to do with them. Essentially,
investors have varying risk appetites.
Some investors can take a very sharp
drop in their investments in their stride,
secure in the knowledge that over the
long-term their investments will do just
fine. Another group of investors may
have a slightly different take on this -
they do not like to see too much
fluctuation in their investments; for this
they are willing to earn a slightly lower
return.
If you belong to the first category, it
means that you have a higher risk
appetite. Since you can absorb
19 visit us at www.personalfn.com
Evaluating Child Funds
your child's education) you must Volatility
consider adding a bit of equities to your The fund with the best track record on
fluctuations in your investments you portfolio to accumulate a sizeable curtailing volatility is Tata Young Citizen
can allocate a portion of your assets to amount. To that end, in our examples, Fund (Standard Deviation 4.22). One
equities. Equities may be volatile in the we have considered child funds that can reason for a better performance on
short-term, but over the long-term (3-5 invest upto 70% of assets in equities. volatility is undoubtedly the lower equity
years) they stand a better chance of Parents who are not comfortable with a allocation (46.3%). HDFC Children Gift -
outperforming other investment avenues higher equity weightage, can invest in Investment Plan (5.78%) is a distant
like fixed deposits (FDs), National the 'lower equity' (usually 20-40% of net second. Clearly, PruICICI Child Care
Savings Certificate (NSC) and Public assets) options of these child funds. (6.48%) has paid the price for pursuing
Provident Fund (PPF). Since saving for an aggressive equity allocation strategy.
your child is a long-term commitment (as
long as 20 years if you start when your Child Funds: Slow and steady
child is 1 year old), you can add a Child Fund NAV 1-Yr 3-Yr SD SR Equity Exp
significant amount of equities to your
(Rs) (%) (%) (%) (%) Ratio (%) Ratio (%)
child's portfolio.
Pruicici Child Care (GP) 32.65 25.9 34.6 6.48 0.30 64.6 2.00
However, if you have lower tolerance for Principal Child Benefit (CB)42.37 29.1 30.9 6.01 0.31 61.3 2.50
investment fluctuations, we recommend HDFC Children Gift (IP) 21.67 19.6 27.5 5.78 0.30 70.4 2.25
that you go in for lower equity
Tata Young Citizen 19.23 21.2 25.4 4.22 0.33 46.3 2.41
allocations. We urge you not to snub
equities as over the long-term (over 5 Crisil Balanced Fund 27.6 25.1
NAV data as on July13, 2006. Growth over 1-Yr is on CAGR basis. Expense ratio as on September 2005.
years) perhaps no other asset can match SD - Standard Deviation. Net Assets as on June 30, 2006. Equity component as percentage of net assets
up to the demands of the spiralling costs as on June 30, 2006, the debt weightage is arrived at by subtracting the equity weightage from 100 .
of higher education, marriage, property
for your child. Studies have shown that
over the long-term (over 20 years) FDs, Performance Risk-adjusted Return
bonds and gold do not even beat Over 3-Yr (an ideal time frame to evaluate Put simply, risk-adjusted returns are a
inflation, let alone give a return to provide a long-term investment), PruICICI Child measure of the fund's ability to clock
for education and marriage. The same Care (Gift Plan) is the leader of the pack growth compared to a risk-free
studies give the thumbs up to equities with an NAV (Net Asset Value) benchmark return. The higher the Sharpe
when it comes to going one up on appreciation of 34.6% CAGR Ratio (which calculates the
inflation over the long-term. So if you (compounded annualised growth rate). outperformance) the better is its ability
want to go one up on rising engineering/ The fund was helped in no small to clock growth per unit of risk.
MBA/medical education costs, equities measure by its 64.6% equity allocation
are your best bet over the long term. (as on June 30, 2006). Principal Child Tata Young Citizen Fund (0.33%) is the
Benefit (Career Builder) with 30.9% best fund on this parameter. Principal
While as financial advisors we can't CAGR is also a beneficiary of a relatively Child Benefit (0.31%) emerges as second
make this decision for you, our view is high equity component (61.3%). best.
that when you have a long-term
investment objective (like saving for
visit us at www.personalfn.com 20
 Evaluating child funds
What you need to look at before
investing in a child fund:
1. More equities should not be looked
at with apprehension even if you are
risk-averse. Remember this is an
investment for your child and not for
you. While we do not recommend that
you go all out in equities, a 30% (debt) -
70% (equity) allocation is advisable
(depending on your risk appetite).
2. The child plan's track record is
important. Evaluate the NAV Returns,
Volatility (Standard Deviation) and Risk-
adjusted Return (Sharpe Ratio) of child
funds before making a choice. Since
investments in child funds are for the
long-term, evaluate their performance
from a long-term perspective of 3-5 years
and not 6-12 months.
21 visit us at www.personalfn.com
3. While comparing child funds across
AMCs, make sure you are comparing
apples to apples. Across AMCs, child
funds have varying equity components.
Over the long-term, it is primarily the
equity component that propels the
returns of the child fund. So make sure
you are comparing returns of child funds
with comparable equity components so
as to make an intelligent decision.
You have taken the first step if you have
identified mutual funds as a means to
accumulate wealth for your child over
the long-term. Having read this article,
hopefully you now know what to look at
while evaluating child funds. Mutual
funds can prove to be an ally for you
and your children. Once you have
selected the right funds, you are well on
your way to building a corpus for your
child's future.
ITC
Equities
Equities and Your kid(s) - Do's and Don'ts
How does one decide an equity portfolio
to meet future financial needs of one's
child and how different can that be from
a regular long-term equity portfolio? Both
these portfolios have an investment
horizon of five to fifteen years and in both
cases, one has to choose a company with
immense scrutiny because the business
model of the company has to be robust
to withstand ups and downs in the
economy over that long a time horizon.
Here is our 'Do's' and 'Don'ts' when it
comes to building an equity portfolio to
fund your child's education/marriage/
house.
First, the foundation stone…
Given the fact that there are many things
that an individual has to plan for,
including buying a property, saving for
the post-retirement phase and funding
child's education/marriage/property, it is
pertinent to arrive at an appropriate
equity allocation. This is critical because
the child's future cannot be compromised
for one's immediate financial needs i.e.,
one should not sell the part of equities
that is allocated for your child to meet
your immediate financial expenses.
Otherwise, the entire purpose will be
diluted. It is pertinent to identify your
goals and build your equity portfolio
accordingly. This is the foundation of
financial planning for your child.
Of course, how much to allocate towards
child's future in one's equity portfolio is
dependent on individuals. But we have
drawn a plan to make it simpler for one to
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decide. In the overall equity portfolio,
since child's future should have a larger
weightage because the needs are more
immediate than retirement planning. For
instance, for a 30 year old, having a small
child, the child's higher education and
marriage is 20 to 25 years down the line
whereas retirement planning is 30 years
down the line.
Now, the Do's while planning an equity
portfolio for your child's future…
1. Cost of living and equities
As it is known, in the long-term, the cost
of living is likely to increase. Education
costs, across grades, have been
spiraling upwards in the last five years
and are likely to maintain the momentum
in the long-term. The same is the case
with property and other needs. Given
the fact that equities tend to be more
rewarding in the long-term as compared
to other asset classes (after adjusting
for inflation), we believe that there is a
compelling case to invest in equities for
one's child future. Consult your equity
advisor to draw a list of stocks for the
long-term and invest only if you are
convinced about the company (not just
based on what your equity advisor
thinks is right).
2. Foreign education - Foreign Stocks
India, being a developing economy, will
depend on foreign capital to grow and
to that extent, the Rupee is expected to
depreciate against the greenback (the US
dollar). As such, say after fifteen years,
22
 Equities
you will definitely need more Rupees to
buy one US Dollar than what you need
now. So, in case you wish to give quality
overseas education to your child,
investing in US Dollar denominated
assets can be a rewarding option in the
long-term. As we go forward, we believe
that the doors will be open much wider
for Indian investors to invest abroad (not
just the US).
3. Identify the surplus
It is pertinent to approach equities like
the way we pay premium on a child
policy, with at least a fifteen-year
perspective. Invest only that portion of
your surplus in equities that you do not
need in the future. This is perhaps one
of the major factors that influence the
final outcome.
4. Large-caps or mid-caps?
In our view, this is an individual decision.
But since you are investing with a long
horizon, it is desirable to have relatively
higher exposure towards large-caps to
WHAT IS YOUR OBJECTIVE?
WHAT YOU HAVE TO PLAN?
MY FIRST PROPERTY
POST-RETIREMENT NEEDS
CHILD'S FUTURE
EDUCATION MARRIAGE PROPERTY
OTHER FINANCIAL COMMITMENTS
23 visit us at www.personalfn.com
start of with. Companies like HDFC,
Gujarat Ambuja, Asian Paints and SBI
are names that have managed business
cycles in the past very well. Yes, mid-
caps can be rewarding but in our view,
one has to tread with caution. Since mid-
caps, by nature, are relatively marginal
players or niche players, they are more
susceptible to shocks, be it external
(global and domestic economy) or
internal (management depth and
execution capabilities).
The Don'ts while planning an equity
portfolio for your child's future…
1. Equities are a risky asset class
Just investing for ten to fifteen years do
not mean returns will be higher or there
are no risks. The period between 1992
and 2002 was a classic example that
investing in stocks need not be
rewarding in the long-term as well. Also,
as the Indian economy becomes more
globalised, companies will be highly
vulnerable to external developments (like
HOW ONE CAN PLAN YOUR
EQUITY PORTFOLIO?
Others - 20%
Retirement - 35%
Child's future - 45%
September 11, Iraq war, SARS and
interest rate movements).
2. Never take a short-term view Like
Rome was not built in a day, it takes
decades for companies like Infosys and
HDFC to implement their vision. Yes,
there will be short-term gyrations in terms
of financial performance but in the long-
term, stock prices will track earnings
growth and cash flow generation,
provided the management is good at
execution. We suggest investors not to
involve in short-term trading or investing
with a six months horizon when it comes
to planning for your child. It is better to
stay away completely.
3. Switching portfolios
We suggest investors do not dilute that
part of the portfolio allocated for the
child's future. In case of a compelling
need, we suggest they dilute the 'others'
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Equities
portfolio and/or maybe, a portion of the
'retirement planning' portfolio.
4. Review portfolio
The blue chips of the 1990s like Bombay
Dyeing, Century Textiles, ACC and BPL
are no longer in the limelight. As the
Indian economy grows, there will be
many new companies from new sectors
like logistics, transportation, pharma,
media, and software to invest. So, it is
pertinent to review one's portfolio every
year critically. As it is commonly said,
do not get married to your stocks.
We hope that the do's and don'ts will
enable you to plan your savings in a
optimum manner to achieve desired
long-term goals. Happy investing!
By Equitymaster.com, an independent
research initiative. Equitymaster offers
subscription based research services for
individuals and institutions.
24
 Fixed Income
Interview
"Assure" your child's future
Having discussed the importance of
mutual funds and insurance products
while building a portfolio for the child's
future needs, we now put assured return
products under the scanner. As the name
suggests, investments in assured return
avenues (or fixed income instruments as
they are commonly referred to) yield a
fixed income. Hence investors are
unambiguously aware of the returns
which their investments will generate at
the end of the designated investment
tenure. This is in stark contrast to
equities and mutual fund schemes
wherein the returns generated are a
factor of the performance of markets.
As regards, why assured return schemes
should feature in the portfolio. The
answer to that lies in the concept of asset
allocation. Simply put, asset allocation
is the process of building a portfolio
comprising of various assets like
equities, fixed income instruments, gold
and property among others in line with
the investor's risk appetite to achieve
his financial goals. Investing in diverse
asset classes provides the benefits of
diversification. Hence a downside in one
asset class can be offset by the presence
of another, thereby ensuring that the
portfolio is unaffected.
In the present case, the objective is to
build a corpus which will ensure that
the child has a financially secure future.
Hence, typically investors should have
sufficient time at their disposal. As a
result, investments with a long-term (at
25 visit us at www.personalfn.com
least 5 years) tenure should be
considered. Small savings schemes like
Public Provident Fund (PPF) and
National Savings Certificate (NSC) rank
among the most popular assured return
schemes. Similarly variants of
conventional fixed deposits like
"variable" rate deposits can also prove
handy.
Public Provident Fund (PPF)
With a 15-Yr time frame, PPF is designed
to promote long-term savings.
Contributions to the scheme presently
yield a return of 8.00% per annum.
However the same is subject to revision;
hence while the returns are assured,
they are not fixed. About 6 years ago,
the scheme offered a return of 11.00%
per annum. As a result a review in line
with market rates cannot be ruled out.
Investors are required to invest at least
Rs 500 every year to keep the PPF
account active; the upper limit for annual
contributions has been set at Rs 70,000.
Contributions to the scheme are eligible
for a deduction under Section 80C of
the Income Tax Act. Also interest income
from the scheme is tax free under Section
10 of the Income Tax Act.
The scheme's 15-Yr time frame is truly
the clincher. Parents can use the scheme
for making regular contributions
towards their children's higher education
or to build a corpus for their children's
marriage.
PPF doesn't score too well on the liquidity
front. Withdrawals are permitted on
completion of the 6 years from the end of
the financial year when the first deposit
was made. Also the amount which can
be withdrawn is dependent on the
balance in the PPF account. Hence it is
imperative that parents utilise the scheme
for "truly" long-term savings.
National Savings Certificate (NSC)
Apart from the investment tenure (6
years), NSC varies from PPF on a vital
parameter i.e. the returns are assured. The
interest rate at which investments are
made is locked-in for the entire tenure.
Effectively the investment is insulated
from any external changes. Presently
investments in NSC fetch a return of
8.00% per annum with half-yearly
compounding. However unlike PPF, the
interest income is fully taxable. As a result
for an investor who falls in the highest
tax bracket, the effective return would be
5.55% (8.00% less 30.60% i.e. 30.00% plus
2.00% for education cess).
The minimum amount for making an
investment in NSC is Rs 100; there is no
upper limit. Akin to PPF, investments in
NSC (subject to a limit of Rs 100,000) are
eligible for deduction under Section 80C
of the Income Tax Act.
NSC can be best used for gainfully
investing one-time surpluses and making
lump sum investments.
Like PPF, NSC scores poorly on the
liquidity front. Premature encashment is
only allowed under specific
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Fixed Income
circumstances such as death of the
holder, forfeiture by the pledgee or
under court's order.
Kisan Vikas Patra (KVP)
Kisan Vikas Patra operates on the
premise of 'doubling' the amount
invested over a period of 8 years and 7
months. Hence the scheme offers a
return of approximately 8.50% per
annum. Given that the returns are fully
taxable, the effective return would be
lower i.e. approximately 5.90% for an
investor whose income is chargeable to
tax at the highest rate. The minimum
investment amount is Rs 100, while there
is no upper limit for investing in the
scheme.
Unlike peers, PPF & NSC, investments
in KVP are not eligible for any tax
benefits. However the scheme does
score on the liquidity front vis-à-vis its
peers. Premature encashments are
permitted after a period of 2.50 years;
however a loss of interest has to borne
on the same.
Fixed Deposits (FDs)
FDs represent assured return
instruments in their simplest and most
conventional form. However they have
typically been prone to the same
shortcomings as other assured return
instruments. For example, in a rising rate
scenario, the locked-in interest rate can
lead to an opportunity loss when fresh
offerings offer higher returns.
The solution in present times lies in
investing in variable rate deposits. As
26
 Fixed
Retirees
Income
the name suggests, the coupon rate on
these instruments is not fixed. Instead,
it is reset in line with the change in a
benchmark rate. Hence in a rising interest
rate scenario, the FD would yield higher
returns; on a flipside, when interest rates
are on the decline, the investment will
earn lower returns.
Another factor which needs to be
considered while investing in FDs is the
risk borne. Small saving schemes like PPF,
NSC and KVP have a sovereign
guarantee, and offer the highest degree
of safety. Similarly, investors would do
well to invest in FDs with an 'AAA' or
equivalent rating which signifies high
safety levels. Akin to NSC and KVP,
interest income from FDs is taxable as
well.
Fixed Maturity Plans (FMPs)
Strictly speaking, FMPs don't fall in the
domain of assured return instruments;
instead they are offerings from the
mutual funds segment. However they
are reasonably similar to fixed income
instruments in their structure. FMPs are
close-ended debt funds (investments
can only be made during the new fund
offer stage) with a fixed maturity horizon.
FMPs target a given yield (return) at the
time of investment and stay invested in
those debt instruments till maturity.
Effectively, investors are assured of
clocking the designated return if they
stay invested for the entire investment
horizon. However some minor
deviations in the returns on account of
market factors cannot be ruled out.
Similarly if the fund is invested in paper
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of AAA or equivalent quality, the credit
risk is minimised. This translates into a
sort of capital protection for investors.
An interesting variant in FMPs is the
one which invests a smaller portion
(about 30.00%) of the corpus in equities.
The idea is to combine the power of
equities with the stability of debt. For
example, the fund might invest at least
80% of the corpus in debt. The debt
portfolio is then designed in such a
manner that the amount of money
invested is equivalent to the original
investment in the scheme i.e. 100%, on
maturity. This leaves the balance (20%)
of the initial corpus for making
investments in equities. Thus while the
debt component attempts to preserve
investors' capital, the fund can expect
to clock growth from the equity
investment.
At Personalfn, we believe FMPs of the
latter variety can emerge as preferred
investment avenues for investors with
moderate risk-appetite going forward.
An example will help us better
understand the kind of returns an FMP
launched in the present scenario can
deliver. We shall assume that the fund
with a 5-Yr investment horizon will hold
an 80:20 allocation in debt and equity
instruments respectively. The debt
component will clock a growth of 8.50%
per annum while equity component will
appreciate by 12.00% CAGR over a 5 year
period. Given the present scenario in the
debt and equity markets, these returns
are feasible.
Fixed Income
As can be seen from the table, the FMP available to investors, we now shift our
can deliver a return of 9.20% per annum focus to the process of building the
over the 5-Yr time frame. Since the portfolio. Broadly speaking, the schemes
intention is to build a corpus for the short-listed are of the 'assured and fixed'
i.e. NSC and KVP and 'only assured' i.e.
FMPs: Combining risk with safety PPF and variable rate deposits variety.
Asset Expected Allocation Return FMPs with their unique market-linked
Class return (%) (%) (%) yet assured nature complete the
Equity 8.5 20.0 6.8 triumvirate. The key lies in building a
Debt 12.0 80.0 2.4 portfolio comprising of the above
Total 100.0 9.2
schemes in the right proportions.
child's future needs, the growth option At a time when interest rates are on the
should be chosen over the dividend rise, allocating a higher portion to only
option. The scheme being a debt fund, assured (PPF and variable FDs) category
the returns will attract long-term capital would be a prudent choice. Such
gains tax at 10.00%. This translates into investments would be equipped to
a post-tax return of 8.28% for the investor. benefit from any further uptick in interest
The impressive post-tax returns vis-à- rates. Conversely, in a situation when
vis conventional avenues like NSC and interest rates are softening, holding a
KVP notwithstanding, investors would higher portion of the corpus in avenues
do well to understand that the projected like NSC and KVP would be the right
returns and the proposition of capital strategy.
preservation are at best sound estimates
and not explicit guarantees. The availability of FMPs would largely
depend on the market conditions and
How to build a portfolio? the access to attractive debt paper.
Having discussed the various options Investors on their part must ensure that
from the assured return segment a part of their investible surplus is held
The assured return avenues face-off
Scheme Return Term Min Investment Premature Effective
Encashment Return
Public Provident Fund 8.00%^ 15 yrs Rs 500 Yes 8.00%
National Savings Certificate 8.00% 6 yrs Rs 100 No 5.55%
Kisan Vikas Patra 8.50%* 8.6 yrs Rs 100 With penalty 5.90%
HDFC Fixed Deposit 7.75% 5 yrs Rs 5,000 With penalty 5.38%
HDFC Variable Rate Deposit 7.75%^ 5 yrs Rs 5,000 With penalty 5.38%
Fixed Maturity Plans 9.20%** 5 yrs Rs 10,000 With an exit load 8.28%
* Approximately ^ Subject to revision ** Not assured
Effective return computed assuming a 30% tax bracket and 2% education cess.
Apart from PPF investments which are capped at Rs 70,000, there is no upper limit on any investment.
visit us at www.personalfn.com 28
 Fixed Income
in cash or other liquid assets. This will
enable them to gain from an attractive
investment opportunity, as and when it
emerges.
This brings us to the importance of
having access to sound investment
29 visit us at www.personalfn.com
advice. A good investment advisor
whose forte is quality advice and prompt
service would be equipped to help you
build and manage your fixed income
portfolio. And the importance of such
an individual at a time when the interest
rate scenario is uncertain cannot be
overstated.
Interview
5 Steps
5 steps to plan for child's future
One of the most important concerns in
the life cycle of a parent is his/her child's
future. Starting with the education of the
child upto his marriage, the responsibility
of parents towards their children seems
endless. As children, we all would have
seen our parents working hard to fulfill
our aspirations, and as parents we
would like to do the same for our
children. It's a continuous process, but
what can make it a bit different is the
approach. We all want our children to
have a bright future, and can help them
to achieve this by planning for them
early and systematically. This involves
making the investment plan, executing
it and tracking it regularly. If this sounds
a bit complicated, don't worry, we have
simplified the process for you.
Step 1: Define your objective
The most important thing to do while
you get down to planning your finances
is to ask yourself why you want to invest
(ask yourself - "Who am I?"). The
answer could be your child's education
or marriage or both. Also, nowadays it's
common for parents to accumulate seed
capital for their children to start a
business venture. So you could have a
variety of objectives in your mind about
what you want to do for your child's
future.
Step 2: Identify the investment advisor
Once you have your objective in place,
the next step is to prepare an investment
plan to achieve the objectives that you
have set for your child. Here the role of
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investment advisor or a financial planner
comes into play, as it is he who has to
draw the investment plan for you. Your
role will be limited to providing him with
inputs in terms of your investment
objective, risk appetite, investment time-
frame, cash flows and the like.
Since your investment advisor has to
play a vital role in helping you achieve
your objectives, it's important that you
connect with the right advisor. There are
instances wherein advisors have
misguided their clients by making them
invest in unsuitable investments only
to boost their own commissions. Such
instances can prove to be detrimental
for your investment plan and can make
your plan go haywire. Thus one has to
be extra cautious while identifying the
consultant because he has to play an
integral part in your child's financial
planning.
Few things that you should look for in
your investment advisor are - firstly he
should be a qualified investment
advisor. Secondly you should check
whether he offers investment solutions
instead of just dropping application
forms. Most importantly, he should be
objective and unbiased in his advice
and should be equipped to offer value
added services.
Step 3: Prepare and execute the
investment plan
After zeroing on your investment
consultant, you must get down to
30
 5 Steps 5 steps
need to be adjusted. One of such
actually implementing the investment your child's life. Remember that the and utilising them with the highest
reasons, which can normally dislodge
plan in line with your objectives. You funds are being set aside to provide degree of caution and for the purpose
your asset allocation, is when stock
should keep in mind that here you are your child with a financially secure future which they are intended is vital.
markets change their course over a
planning for your child's future, which
period of time. As a result you may have
includes his primary education, higher/
to redeem some of your equity
professional education, marriage or even
investments or buy more of them
starting a business. Thus you could
depending on how much risk you are
require sums of money at various points
ready to take.
in time. Hence you should make all these
aspects explicitly known to your advisor.
As you approach the milestones (like
Effectively, you need to bare your
child's professional education or his
financial soul and tell him exactly what
marriage), you have to redeem the
you aim to achieve and the time frames
investments made for that specific
over which you want to achieve your
purpose. One important aspect to be
objectives.
considered while investing for your
child's future is that the monetary
After preparing the investment plan,
requirement will be in phases. This
your investment advisor should help you
means that you will require large chunks
in executing it. This may involve, for
of money normally when your child joins
instance, taking an insurance plan for
a professional course or when he/she is
your child or investing in diversified
getting married. This in turn
equity funds. Though your advisor will
necessitates the need to book profits.
largely handle the investment part, it
Again, all this may sound very
always pays if you personally involve
complicated, but your investment
yourself in the process.
consultant is the one who will keep an
eye on such events and will make
Step 4: Tracking your investments
necessary adjustments to your
Setting your investment plan in action
investment plans. On your part it helps
is the most important step towards
to be informed since it's your money,
achieving your financial goals. But at the
which is being invested for the benefit
same time it is equally important to keep
of your child's future
a regular track of your investments.
Though your consultant will keep a track
Step 5: Don't dip into your child's
of it, but it's also essential for you to be
savings
aware of where your investments are
Your child is precious and so are the
headed. Since the success or otherwise
savings that you have made for him.
of the investment plan will have a
Therefore you should treat the savings
significant bearing on your child's
as sacrosanct and not dip into them for
financial future, it will pay to keep track
meeting your present needs. If you do
of your investments and ensure that they
so, it could result in a monetary crunch
don't go astray. There are several
while meeting some important event in
reasons why your investment plan could

31 visit us at www.personalfn.com visit us at www.personalfn.com 32

Personalised Services from Personalfn

Who are we?

www.personalfn.com is one of India's leading financial planning
initiatives.
We are a part of Quantum Information Services Pvt. Ltd., which is
one of India's most experienced research houses (set up in 1990).
Quantum also offers equity research via its online initiative,
www.equitymaster.com.
Our offerings
• Personalfn helps individuals plan their investments so that
they can meet their financial commitments (like retirement,
marriage and child's education)
• Research on mutual funds and debt instruments
• Tools like the Asset Allocator and MyPlanner which empower
individuals to plan and track their finances
Our publication
• Personalfn also publishes the Money Simplified, a free-to-down-
load monthly guide to help you plan your finances better.
Contact information
To benefit from Personalfn's services, please call us at
Mumbai - 6799 1234 / 7536 New Delhi - 6450 5302/5303
Bangalore - 6535 9899 / 9900 Pune - 6602 9448 / 9732
Hyderabad - 6591 8423 / 8435 Chennai - 6526 2621 / 2622
Ahmedabad - 6450 5215 / 5216
Alternatively, write to us at info@personalfn.com or visit
www.personalfn.com

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