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Should you save and invest for your child’s education?

If you did your MBA from IIM Ahmedabad back in 2007, you probably paid somewhere around 4 lacs. Your younger sibling would have paid somewhere around 21 lacs this year. That is 4 times of what you must have paid and a staggering 23% annual increase in the fees.

If the cost of education rises at this pace, after around 18 years, your child will need a whopping Rs. 8.7 crores for the same program at IIM-A. Even at a 10% annual increase in cost, that amount would be close to Rs. 1.2 crores.

Education costs have been increasing at a rate higher than the usual inflation. And the same is true for elementary, primary and secondary education.  Not to mention the additional cost of coaching that you have to incur at different stages of education. The above numbers clearly indicate a need to focus on how you intend to fund your child’s education.

This article seeks to help you formulate a plan for your child’s dream education no matter how old your child is.

For the sake of relevance, let us have 3 categories:

Category 1: If your child is under 10 years of age

Your child in his early years of schooling and has a long way to go in terms of pursuing his education. Planning for children in this age bracket is the easiest simply because you have more time to save and invest. The earlier you start, the more corpus you create. Following are the 3 things you should be doing if you fall in this category:

  1. Start a monthly SIP in a portfolio of mutual funds with predominant exposure towards equity. The time horizon is long term so you may have decent allocation towards mid and small cap funds, if you risk appetite permits that. This will enable you to create a substantial amount of wealth over the long run (Over 7 years).
  2. Every year, try and estimate the corpus you need to fund the education at both graduation and post – graduation stage. Accordingly, increase your monthly SIP every year to ensure that you are able to garner the required corpus. While SIPs in equity mutual funds will help you create wealth, increasing them every year will ensure that you don’t fall short of the amount you require.
  3. Park a small sum of money in a debt fund for any short term requirements. This will ensure that you have surplus funds available for any contingencies.

Category 2: If your child is between 10 – 15 years of age

Your child is probably nearing completion of school and will soon be ready for graduation years. This means that while you do still have time for post – graduation, you might not have enough time for saving to fund his graduation. Following are the 3 things that you should do:

  1. Park your surplus money in a portfolio of debt equity funds. The split between the two categories will be determined by how many years are you still away from completion of school.
  2. Start a monthly SIP in a portfolio of mutual funds and asset allocation is key for such investments. You may keep an allocation of 30-40 percent in debt funds and the remaining exposure should be in a diversified basket of equity funds. The asset allocation should be monitored regularly and should be shifted entirely towards debt as you approach the time when you would need the fund. This will enable you to create a pool of wealth over the long run (Over 5 years).
  3. Increase your monthly SIP every year simply because you have relatively lesser amount of time to save for the post – graduation requirement.

Category 3: If your child is between 15 – 20 years of age

Your child has grown up is perhaps nearing his post – graduation years. As such you have only a few years before she completes graduation and goes for higher education. Here is what you should be doing:

  1. Park your surplus money in a portfolio of debt funds. The split between the two categories will be determined by how many years are you still away from completion of school / graduation.
  2. Start a monthly SIP in a portfolio of mutual funds and asset allocation is key for such investments. You may keep an allocation of 60-70 percent in debt funds remaining exposure should be in a diversified basket of balanced equity funds. The asset allocation should be monitored regularly and should be shifted entirely towards debt as you reach towards the year when the funds are required. However, your exposure should not include the risky category of mid and small cap funds.
  3. Increase your monthly SIP every year simply because you have relatively lesser amount of time to save for the post – graduation requirement.

How do we help?

At CAGRfunds, we help you estimate the amount of money you will require at every stage of education. We also help you define your most suitable portfolio. As you start investing, we ensure that our tools continue to review and re-balance your portfolio whenever the need arises.

Contact Us NOW!

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Salary over by 15th? 6 ways in which you can make it last longer

‘A penny saved is a penny earned’. Yet every month there comes a time when we have to choose between an evening out with friends or a boring dinner at home. Yes, a financial crunch is a bad situation but the truth is that we have all been there and done that. So let us tell you simple yet effective ways to last your salary a little longer.

1. Start budgeting:

Have an opinion on the Annual Budget? Well, how many of us have documented a budget for ourselves? There you are – Step 1: Budget your expenses. This helps us prioritize and thus keep a check on discretionary expenses. So yes, this means you cannot set aside money for a pair of shoes without paying your insurance premium. Learning how to choose what purchase desire can be postponed is probably the key here.

2. Make a list:

How many times have you gone out to the neighborhood departmental store and returned with stuff you had not planned to buy? Making unnecessary purchases is a tempting urge. And the best way to control this urge is to make a list of what is necessary and stick to it firmly. Tick the ones that you’ve taken and look only for those present in the list.

3. Do not get lured by combo offers

How exciting are BOGO (Buy One Get One) offers!! Sometimes they excite us so much that we end up buying 2 of something we didn’t need at all. If you are on a tight budget, this temptation could be dangerous. Allocation of money on the basis of need is the essential element here. Deals like these are usually to tempt the customers to buy things they don’t want. Are you going to fall prey to this tactic? Now you won’t!

 4. Use Prepaid plans

Despite excellent postpaid plans, we tend to be careless about the frequency and duration of our phone calls. Long distance calls, roaming and data consumption is something we don’t really keep a tab on. If this describes you, then you probably need to shift to a pre – paid plan. A pre – paid plan will not only help you reduce your phone bills, but will also help you inculcate a habit of putting a budget to the same.

5. Restrict usage of credit card:

While usage of plastic money is something even our Government is encouraging, it has its own flip sides. You must have felt the psychological difference when you pay with cash vs a credit card. When the crisp notes flow out of your wallet to the cashier, you tend to realize the amount of expense you are making. However, with a credit card, we sometimes don’t even look at the bill and just hand over our card for a convenient swipe. It is only when we get our credit card bills that our eye balls tend to drop out. Therefore, it is almost compulsory for us to restrict usage of credit card. We also recommend that you minimizing the number of credit cards you possess. However, as we move towards a cashless economy and rightly so, using a debit card is better to keep expenses in check.

6. Pay your credit card dues on time:

Often times, we overlook the due date of our credit card bills. While the bill amount might be low, penalty charges for late payment can be as high as 36% annually. Unknowingly, a sizable cash outflow indeed. It is therefore of utmost importance to pay our credit card bills before due date. A helpful tip in this regard is to pre schedule the payment a day prior to the due date. That ensures that the bill is paid even if we forget or get busy with something else.

How do we help?

At CAGRfunds, we help you craft a financial plan which will help you manage your salary better. We guide you to make disciplined investments right at the start of the month. This enables you to not worry about savings. As a result you become more organized with your spendings.

Whatsapp or call us on +91 9769356440 to know more.

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Frequent changes to your investment portfolio can be detrimental

The list of top performing stocks or mutual funds keeps changing frequently. This is of course obvious as the performance depends on various factors and some of these factors are not completely in control of the company’s management. Even good companies with sound management will face ups and downs. There is one obvious question that comes to every investor’s mind – Do we keep churning our portfolio frequently to exit the underperformer and buy the outperformer? My answer to this is overwhelming ‘No’. I believe churning of your portfolio too frequently will do more harm than good.

Let me try to explain further. During the last 15 years, Nifty (including dividend) has grown at an annual rate of 16.7%, to put it in simple terms, Rs. 100 invested 15 years back has now grown to more than 10 times. But, having said that, equity as an asset class is known to be volatile in short periods (see chart below). So, while investing in equity for short term may be tricky, the odds of making money in the long term are quite high.

Now, let us come back to ‘Power of Compounding’, which we had touched briefly in my last article (Read here). This has to be one of the most important financial lessons of all time. As the great Albert Einstein said “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it”.

Here, we will see how holding your portfolio for the long term helps power of compounding play its magic in the most unusual way. If you hold your portfolio for long term, the winners in your portfolio will tend to become dominant, and the losers will become insignificant. The positive impact of the winners will significantly outweigh the negative contribution and your portfolio will compound significantly. Not sure, right? I can understand your circumspection.

Let me explain this by taking a simple two stock portfolio. Stock ‘A’ is a winner, gives 25% annual return over a period of 15 years, while Stock ‘B’ is declining by 25% annually. How has your portfolio performed? I would say good, rather great. Your portfolio has given an annual return of 19.4%. This example demonstrates the power of compounding.

This magic can also work for you. You just have to be patient and give your money long enough time to grow.

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Planning to fail in your golden years?

Yet again, a discussion with few friends on a Sunday afternoon has brought me here today. We were discussing about our future plans and each one of us wanted to retire early and retire rich. No surprises there. What surprised me is that my friends only have a vague idea, no concrete plans about how they are going to achieve this goal. This is true for most of us. With rising cost of living and increasing life expectancy, the need to plan for one’s golden years is absolutely necessary.

Lack of a concrete plan for retirement may lead to problems just when you are least prepared for it. As one of the founding father of the United States, Benjamin Franklin, so succinctly put “If you fail to plan, you are planning to fail”.

Most of us tend to underestimate the retirement corpus. If you need Rs. 50,000 for monthly expenses today, will you need the same after 30 years, when you retire? The answer is no. You will need Rs. 2.2 lakhs every month, assuming just 5% inflation. There it is, now I have your attention. Inflation leads to reduction in purchasing power, by slowly but steadily eating up your money. Learn more about it here.

Let me tell you one more thing. With increasing life expectancy, the non-earning period in an individual’s life is expanding. Someone retiring at age 60 after working for 30 years could live on for another 25 years or more. Assuming your current age of 30 years, current monthly expense of Rs. 50,000, inflation of 5% and retirement age of 60 years, the amount of retirement corpus one needs for 25 years after retirement is Rs 5.3 cr and for 30 years after retirement is Rs. 6.1 crore. These are not small sums by any measure. If you do not start to plan now, there is a high probability to fall short.

Are you now thinking when to start investing for retirement? The answer is as EARLY as possible. If you do that, your money gets more time to grow. Each rupee gained generates further returns. This is called “power of compounding”, and this helps you get rich… and richer over time.

Let us take the above example, say you start investing at age of 30 years and continue to do so for next 30 years. To achieve a corpus of Rs. 5.3 cr at retirement, assuming 12% return on your investment, you will have to invest Rs. 15,391 per month. If you delay the investment by even 5 years, the same monthly installment doubles itself to Rs. 28,630.

Don’t feel overwhelmed by all the numbers shown above, you can take help from your financial advisor for this. The key is to start early, invest regularly and choose the right products for your investments.