If I were to ask 10 parents what is the single most important thing in your life. It is most likely that all would say 'the future of our children'.
You want to give the best to your children. You want to see the future that you have been dreaming about, through the eyes of your children. You dream for them the dreams that you could not achieve yourselves. That is why, you are so emotional about the future of your children. Elvis D'Souza feels the same way for his daughter Rose, who is one year old. Elvis is 34 years old today and his wife together earn about Rs 7 lakhs per annum. But that is not so important.
What’s notable, is the assets worth Rs 3.5 lakhs that he has created for his daughter Rose. First, let us understand what did he do to achieve this? Before she was born in 2005, he put aside Rs 3 lakhs for her. He had investments in his name and simply in his mind, he decided some equity shares and mutual funds now belong to Rose. To make things formal, he opened a bank account in her name and then transferred the money there and continued with the same investments (Saving Account for kids). So far, he has made a profit of Rs. 50,000.
What is interesting is his grand plan, which is to gift her Rs 1 crore when she is 25 years old!
He did not need any mathematician, agent or broker to tell him that expecting a compounded rate of return of 15 per cent per annum for investment in shares and equity mutual funds, Rs 3 lakhs would become approximately Rs 1 crore. Just that simple.
Now let’s get into his mind and explore his logic.
First he wanted to gift her Rs 1 crore with his assumptions of 15 per cent that is so realistic. There is no chance in my opinion that this will not happen. Secondly, he wanted to basically create a level of funding by which he would never have to dip into his pocket ever again for his daughter’s financial needs. Thirdly, he hopes that he will be able to meet all her expenses till she gets married from his ongoing salary, but just as a hedge if he is not able to support her, she should not suffer. So, he took away a part of his investments - Rs 3 lakhs - to be precise and labeled it as ‘This belongs to Rose.’
You might want to know why Rs 3 lakhs? And no other figure? It is a worst-case scenario figure. Here is a quick snapshot of some cash-flows he worked out, assuming a return on investment of 15 per cent per annum compounded.
Just to understand, lets take a wedding as an example. He would like to spend Rs 10 lakhs, the future value at 4 per cent inflation would be Rs 24.64 lakhs and to reach this goal, he needs to put away Rs 99,000 today. Likewise, simply totalling all the amounts he needs today, it works out to Rs 2.86 lakhs. So, he puts away Rs 3 lakhs of funds for Rose. Now, if he can manage the above from his earnings, she gets a gift of Rs 1 crore when she is 25 years old.
For some reason, if he is not able to support her, all her major expenses would be managed without any worries, as seen above. Even if he managed just half of the above, Rose will still get a gift of Rs. 50 lakhs. If he sees three or four stock markets boom period in the next 24 years, all expenses will get managed and Rose will still have her Rs 1 crore. It's just that simple.
You would like to provide your children the best and that is possible. As soon as we have children, we think about Insurance policies, we think about making investments in their names. Elvis realizes that no single education or child based product will help him achieve his objective, so he totally a s all insurance policies, and his strategy would be to invest in shares and equity mutual funds. He wants to give his child a great future, financial security, wants her to enjoy her life so that she does not have to compromise on anything.
The author, Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager.
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