What fathers can do

Investment in education, marriage

Cost of education, right from the nursery level to higher studies, has been going up for the past few years. Planning and saving for your child's future is one the most important decisions. The investor is spoilt for choices. He must take decisions based on his own risk perceptions, time for payout and corpus target. Insurance companies are aggressively marketing child plans and see it as the fastest growing product category.

Life insurance companies offer both traditional and unit-linked (Ulip) child plans. While in Ulips, the decision to invest and take risk lies with the investor, in traditional plans companies decide on investment and give out maturity value and bonus to the customer. Traditional products give returns in the range of five to six per cent, while returns on Ulips are higher over the long term.

In child insurance plans, premium is accumulated over the years and the target corpus is ready at the time of your child going to college or for higher education. In case of the uneventful death of the policyholder (parents of the child), the insurance company pays the rest of the premium.

Mutual funds too have child plans aimed at creating a corpus to finance goals such as children's higher education or marriage. Many mutual fund houses such as HDFC Mutual Fund, UTI Mutual Fund, Tata Mutual Fund, ICICI Prudential and Franklin Templeton Asset Management offer these schemes. Charges in mutual funds are lower compared with Ulips. Typically, one should start investment early. Child plans start from the age of seven to eight years.

Certified financial planner Kartik Jhaveri said, "Child plan by mutual fund is a better option as there are no entry or exit charges. Long-term child plans by mutual funds have given compounded return of 15 per cent. Parents investing for a child's future financial needs can also look at diversified mutual funds."

Apart from education, another priority for a parent is the cost of daughter's marriage. Times are changing but still the cost involved in daughter's marriage has only gone up manifold over the years. Like investing for education, you buy a Ulip or a mutual fund aimed at saving for your daughter's marriage. For example, Fidelity India Children's Plan comprises three funds, namely, education fund, marriage fund and savings fund.

Financial experts point out that in the case of children's plans offered by insurance companies, a significant portion of your contribution is used to provide for an insurance cover in the event of death of insured parent during the policy term and the remaining contribution is invested to help you accumulate wealth for your child's future. In contrast, mutual fund options are pure investment products, which offer different investment choices to suit your financial needs for specific goals such as a child's education or marriage.

Health plans, recurring deposits

Buy a health insurance plan for yourself and your child early. The younger you buy the lesser will be the premium. Drill into your child's memory about the importance of renewing health insurance. Do it yourself for your child till he is financially independent.

"Healthcare costs have increased significantly. Starting early has it advantage. Premium will be low. One should buy a small cover of, say, Rs 1,00,000 for a child. With no claim bonus every year, the sum insured will go up at the same premium," said a senior official of New India Assurance Company. For the age group of 1-20 years, New India Assurance Company charges an annual premium of approximately Rs 1,400 for a sum insured of Rs 1,00,000.

Some things like a recurring deposit always retain the charm. As the saying goes, little drops of water make an ocean. By investing in a recurring deposit, small monthly sums over the years can become a huge corpus that can fulfil your child's dream, such as travelling around the globe.

The aim of the post office or bank recurring deposit scheme is to encourage the saver to make monthly savings. With an effective rate of interest (8 per cent a year), an investment of Rs 100 every month in 60 instalments will earn you Rs 7,289 after five years. Bankers point out that a post office recurring deposit may be better as the advantage with post-office deposits is that it offers a fixed rate of return for the duration of the deposit, while banks constantly review their recurring deposit rates.

What children can do

Annuity for dad

After retirement income stops but expenses don't. Most financially independent sons and daughters admit that the role played by their fathers has been crucial in determining what they became in life. With inflation increasing the cost of essentials, your father's savings today might not suffice to meet the cost of necessities throughout his retired life. As a son or a daughter, your chances of getting a bonus or windfall are far higher than your dad. Use such a bonanza to buy an immediate annuity plan for your father, if you feel that the retirement corpus built by him may not be enough. A life annuity makes a series of future payments in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity).

"A son or daughter can purchase an annuity plan for parents. He can either opt for a whole life cover (till they survive) or for a specific time period (10, 15 or 20 years). Supposing the parents are 60 years old, by paying a lump sum of Rs 8-10 lakh, the son can make sure that his parents receive around Rs 10,000 every month," said Suresh Agarwal, executive vice-president, Kotak Mahindra Old Mutual Life Insurance.

An immediate annuity plan, which can be purchased by paying a lump sum amount, provides for annuity payments of a stated amount throughout the lifetime of the annuitant. Various options are available for the type and mode of payment of annuities. For example, under LIC's Jeevan Akshay VI, the annuity payable for life increases at a simple rate of 3 per cent a year. The minimum age for such plans is around 40 years while the maximum age is around 75 years.

Make him debt-free

Many children are laden with the obligation to repay their father's debt. Untimely job losses or mounting costs could have forced your father to take a mountain load of loans. Srikanth Banerjee, an IT professional, recounts how he was initially shocked when he discovered that his father had an outstanding debt of Rs 3,00,000 to fund his recent marriage.

"Most fathers will spend the last penny of their savings to carry out their son's or daughter's wishes. Most Indian fathers prefer to use their provident fund or even take debt when the situation calls for it. Paying off any debt that may be left is a good idea," said Anil Rego, CEO, Right Horizons, who advises clients on financial decisions.

With a pension income or a lump sum from the sale of investments, the repayment capability of your father will be much lower than yours. But even if you have money and good intentions to pay off the loan, the sensitive nature of a financial burden being passed from a father to his children may make the repayment an event that seems complicated.

It might be an ego issue or at first your father may not be even comfortable discussing the debt with you. "As an adult as well as a son or daughter, recognise that paying off debt immediately is better than keep paying equated monthly instalments. Convince your father that you want to make him a free man. After the loan obligation is off, keep the option open for him to repay you back. That will ensure that your father will retain his dignity. Let it remain your little secret," advises Gaurav Mashruwala, a reputed financial planner.

Source : www.mydigitalfc.com