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Traditionally people's idea about gifting is about buying someone a physical good, which could be flowers, chocolate, cloths, diamond, jewellery, car or some other thing. Cash gifts are also popular among people. A new trend, however, is slowly emerging: Gifting a financial product. Such a gift could be a mutual fund SIP, a fixed deposit or an insurance plan. And interestingly in this segment, it's the grandparents who are taking the lead.

Why Gift Financial Products:
  • Such gifts could lighten the financial burden of parents
  • The aim is to give something whose value could appreciate over time. Most physical gifts depreciate over time
  • One way is to initiate an investment in one or more mutual fund schemes and then invest occasionally
  • The second method is to start an SIP in a MF scheme where the giver takes care of the SIP also
  • If a financial product is gifted to a child, with enough time for it to grow, the value could multiply several times
  • Indians assign high sentimental value to such gifts which prevents pre-mature redemption, which in turn leads to compounding


Do’s & Dont’s:
  • Do a proper due diligence if the SIP could create wealth in the long run
  • Check the long term track record of the fund house and the fund management team
  • Decide if the SIP should be in the name of a child or an adult, the guardian of the child
  • If the person who’s gifting the SIP is not the child’s parent, there could be legal limits on the value of the gift


Source: Economic Times

Create “ commitment saving devices” that will help them build wealth steadily As a parent, are you forcing your son or daughter to buy a house early in his or her career? Your intention may be to inculcate disciplined savings; for the EMI paid on the mortgage every month is forced savings that translates into home equity. Such forced savings is called commitment savings. And the product or process that enforces such commitment savings is called the commitment savings device.

In this article, we discuss why buying a house may not be an optimal savings device for someone starting their career. We also discuss alternative commitment savings devices that you should consider for your children.

Commitment Savings:
Creating a commitment saving device is meaningful from a behavioural perspective. Why? Consuming current income gives an individual instant gratification. Buying an expensive electronic gadget, for instance. Whereas savings will defer happiness to a later date when the individual uses the accumulated money to consume goods and services at that point in time. Clearly, individuals prefer instant gratification to deferring happiness. And that means consuming income as against savings. This argument is especially true if an individual has just started his or her career. That is why as parents, you should create commitment savings devices for your son or daughter. But real estate may not be an optimal commitment savings device. Why?

As someone who just started working, your daughter is yet to settle down in her career. What if her professional work takes her to another city? Would you let the apartment on rent? The problem is that rental yields are typically lower than the interest rate on the mortgage. The commitment savings device will earn negative cash flow. In addition, by forcing your daughter to buy a house, you may have unintentionally skewed her asset allocation. She may have to pay about 40 percent of her post-tax monthly income as EMI for the next 10-15 years, depending on the home loan tenure. That means you have converted significant portion of her future income into a lumpy, illiquid, single immovable investment today. Is that optimal? Why not look at other commitment savings device?

Lockbox Investments:
You want your daughter to invest regularly. You also want to ensure that such investments are difficult to liquidate so that she is committed to accumulating wealth. We call such investment as “ Lockbox”. You can choose among three types of lockbox. The first is the product lockbox, where the product structure is such that your daughter cannot easily liquidate the investment. Public Provident Fund (PPF), for instance. Your daughter has restricted access to the money invested in PPF before it’s 15-year maturity. The maximum investment in any year is capped at Rs.1.5 lakh. You can, therefore, also look at recurring deposits with banks that charge a premature withdrawal penalty. The penalty act as a deterrent to withdrawing money before maturity.

Then, there is regulatory lockbox- investment with restricted access because of regulatory reasons. Equity Linked Savings Schemes (ELSS), for instance. The amount that your daughter invests each year is locked for three years under Income Tax Act.

The last type is the process lockbox. Here, you can encourage your daughter to set up a systematic investment plan on an equity mutual fund with you as the investor! Why?That way, money will be debited from her account every month, but you have to sign the application to redeem the units. Do not share the login and password to the fund account with your daughter! You should preferably align these commitment savings devices with life goals that you want your daughter to achieve.

Source: Business Line

Although holding on to cash to wait for that right opportunity may sound tempting, it is advisable to maintain only as much cash as is needed for emergency situations

Portfolio analysis and management theory focuses on risk-return profile, balancing of debt and equity portions and managing risk. However, one portion of the portfolio that is not given much attention even though it warrants greater consideration, especially in an under-invested country like India, is cash.

Holding cash
Some investors feel that holding cash is like holding an option—the option to take advantage of volatility in the market. Thus, when the volatile stock market provides you an opportunity to buy wide-moat companies at bargain prices, you will have cash in hand to take advantage of the irrationality. The most important role that cash serves in a portfolio is that it enables investors to take advantage of opportunities that may arise suddenly. For most people, the absolute minimum level of cash to keep in hand is an emergency fund amounting to six months’ expenses. How much cash you should hold depends on who you are, how you are investing and your investment horizon. Cash can be a temporary parking place for funds awaiting investment. When you have a large sum, you should not rush to invest it but rather take the time to plan a strategy and, if appropriate, get into the market in a staggered way. When you are invested in an asset class that has had a big run-up in prices and seems overheated, you might take some risk off the table by converting some of your investment to cash (which may have tax implications), even if you have not yet decided where to reinvest.

Cash holding depends on age
The percentage of cash holdings also depends upon the age of the individual, more importantly whether he is in the working age group or the retired age group. While cash holding of 7-10% of total financial assets is sufficient for the former, retired people should keep a higher percentage, say 10-15%, of their financial assets in cash in order to meet recurring expenditure or any medical emergencies. Holding cash carries its own costs as well. Cash does not any earn any interest, except for that lying in savings account deposits or liquid funds. As a result, inflation eats into the purchasing power of idle cash. Another drawback of holding cash in a rising market is the opportunity cost in the form of foregone returns in the equity market.

Timing the market
Trying to time the market more often than not ends in investors missing the best days and hence earning significantly less than what they could have earned by staying put. Most investors get out when it’s too late and wait way too long to get back in, compounding losses and missing out on gains. Investors need to understand the difference between buying specific assets that are attractively valued after a dip, and the odds of successfully timing the market as a whole. Although holding on to cash in order to wait for that right opportunity may sound tempting, it is extremely difficult to implement in the real market scenarios. Even experienced mutual fund managers are not immune from taking wrong calls every now and then. In such a case, it is advisable to maintain only as much cash as is necessary for emergency situations. An investor should first decide his broad financial asset allocation among equities, debt and cash depending on his risk return profile and liquidity requirements. He should at intervals keep reviewing his portfolio and re-balance it, but refrain from increasing his cash position as much as possible. This will enable him to participate in the market moves and prevent him from under-performing.

Source: financialexpress.com
Mutual funds are setting up innovative financial processes for seamless transfer of funds for the long term From childhood, our parents help us grow into an adult. During the growing up years we depend on our parents for all kinds of support. When we grow up and our parents enter their sunset years, it becomes our duty to support them in every possible way. Even if our parents don’t need our support, often we feel the need to do it. There are financial products which takecare of long term support to our parents
  • Mutual fund houses offer a way to set up a long term solution for financial support to parents
  • You can set up the facility once and the fund house will take care of regular transfer of money to your parents
  • Such a facility offers ease of transfers and also maintains regularity without fail
  • All you need to do is invest in a select fund and give an instruction to the fund house for transfer of funds to the designated account of one of your parent
  • Both you and your parent should be KYC compliant
How To Go About It:
  • Select from among the funds that MFs offer for such a facility
  • Opt for systematic withdrawal plan (SWP) in growth option of the fund
  • Set up a definite SWP amount
  • Don’t opt for dividend option since dividend payout is not fixed
  • It could be set up for existing as well as new investments
  • You can set up the SWP for perennial transfer or for a definite period of time


Source: Economic Times
Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to suri@suriseetaram.com.
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. suriseetaram.com and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. suriseetaram.com, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.